Colocation is a bit more cost effective to offer than dedicated servers. First of all, there is no upfront cost required to service a customer unless its a high-end one. Assuming you have the rackspace, power, ip addresses, switch ports and bandwidth to service them, you wont have to shell out any money to get the equipment because they'll be providing it.
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James Cornman - <james@crnc.net> CRNC - (877) FOR-CRNC - High Reliability Hosting live from NYC and NJ