I use Rackspace - around £400 a month for each Dell Dual XEON RAID1 15K SCSI setup with managed backup and service. Runs RHEL5 (although I tend to use BSD almost exclusively RackSpace don't support it). They don't support remote KVM (their only downside) but engineers 24/7 will help you out (for a fee unless its minor...).
Currently run 10 of these servers so I am paying £4K/month (roughly) for servers.
However you can get a dedicated Celeron for 30 quid a month and a Good SMP machine for under 100. But you really need to consider bandwidth availability and network reliability as well as power reliability etc etc Also on a failure will they help.. some providers may take up to 48hrs to sort an issue out and that means loss of profit (and potentially google issues!).. I could go on... Been there... its a not very pleasant experience.
Previously I hosted my own Dell 1U Servers in a Data Centre (locally) but found it a pain in the arse as they were charging me 50-100 quid a callout just to get an hour physically with the machines (I daren't reboot remotely because a boot failure would cost me 50 quid!!). Also the machines were not cheap and are now lying idle in my basement!!!
Having your own server means you can utilize a consistent metric base for scalability and performance. I run various tools and can immediately determine bottlenecks and plan accordingly. I like that.
If you do go the Virtual Server route you need to trust them when they say they guarantee a performance minimum. For example they might host more VM's than they admit on a machine (to make more profit). Trust noone here.
If you are making say about £1K a month - the decision really is made for you. I know no serious infrastructure that depends on virtualization for critical functions. To me my profit is critical
I would like to add to this... research carefully your provider... back in '06 in a moment of madness (to quote Ron Davies!) I purchased a dedicated server deal off ebay which turned out to be a one man cowboy operation! The service was a nightmare... and the guy blamed it on everything from flooding to poor routing but NEVER to himself!
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