Online services and web hosts utilize web hosting colocation a lot and have done for a long time, however, there are other kinds of server colocation too.
Sometimes companies need a data center and they need it to be managed and cost effective.
Using your own staff and and a room to house your servers correctly can be terribly expensive, there is rack management, cabling, uninterruptible power services, lighting, air conditioning, fire suppression and more to think about. Of course man hours and staffing a staff who is versed in server maintenance can be costly too.
This is why thee are server colocation services. To put it simply these are professionally (hopefully) built data centers where there are a number of server racks (the boxes where servers live) filled with servers.
You can rent or lease these servers to suit your needs.
Maybe you run a network and need dedicated file storage, or a contingent server location, maybe you need a backup, or web hosting.
The advantage of using ‘colo’ is that the servers are professionally managed, there is a dedicated ‘pipeline’ (Internet connection), on-site support staff, top class services, network security, guaranteed up-time, and sometimes your choice of servers and services.