Virtual data centres vs physical data centres vs colocation
Key Takeaways
- Increasing data demands and compliance pressures are forcing organisations to reconsider their data centre infrastructure.
- The three primary data centre models, virtual data centres, physical data centres and colocated data centres, each offer distinct advantages.
- Choosing the right data centre model involves assessing cost, scalability and compliance requirements, while balancing today’s needs with future-proofing against evolving technology.
Australian organisations are operating in a rapidly changing technology landscape. Data demands are rising, compliance standards are tightening, and cost pressures are mounting. Technology leaders are forced to balance these challenges while keeping day-to-day operations running.
Meeting these demands starts with the data centre. Indeed, choosing the right data centre model is crucial. It’s a strategic decision that shapes long-term agility, compliance and resilience. And organisations around the world are making the necessary moves. Gartner estimates that global data centre spending has grown 42.4% YoY to reach US$474.8 million (approx: AUD$719.48 million) in 2025. For Australian organisations, this global surge signals a clear imperative to align data centre strategy with long-term business goals.
For organisations that want the flexibility of the cloud with the control of an owned environment, three data centre models stand out: virtual data centres (VDCs), physical data centres, and colocation services. Each offers different cost models, levels of control, and compliance implications.
In this article, we’ll break down the pros and cons of each. We’ll give you clear comparisons, a cost analysis, compliance insights, and a decision framework to help you choose the right path.
Understanding your data centre infrastructure options
Virtual Data Centre
A virtual data centre (VDC) is a cloud-based model that delivers compute, storage, and networking as a flexible, software-defined environment. There is no hardware to manage, scalability is near instant, and costs are typically subscription-based. For Australian organisations, virtual data centre services are ideal for businesses that want rapid deployment, and the flexibility of control from anywhere, without capital investment.
Physical Data Centres
A physical data centre involves on-premise or leased infrastructure that you fully control. They give you complete hardware control, tailored performance optimisation, and advanced customisation. Costs are steep, with a high upfront investment required. Physical data centres are best suited to businesses with strict performance, sovereignty, or compliance requirements, and is often considered by enterprises running hyperscale data centre workloads.
Learn more about physical data centres
Colocation
A Colocation or managed data centre allow you to own the hardware but host it in a professional facility. You gain resilient power, cooling, security, and connectivity without the burden of running your own site. Costs include the cost of monthly, plus the cost of building and maintaining your hardware. Colocation services provide a hybrid approach: you keep hardware ownership and control, while benefiting from managed facilities and server colocation expertise.
See Interactive’s colocation services
Complete data centre comparison: Costs, migration, and capabilities
| Feature | Virtual Data Centre | Physical Data Centre | Colocation |
| Cost Structure | OpEx model with monthly fees | High Capex, plus ongoing OpEx | Mid-range: monthly fees plus hardware |
| Control & Customisation | Limited hardware control, strong software control | Full control over hardware and setup | Hardware control with facility services |
| Scalability | Supports instant scaling | Hardware-dependent, slow expansion | Hardware-dependent, moderate speed |
| Security & Compliance | Multi-layered, shared responsibility | Maximum control, customisable | Strong facility security, shared model |
| Migration Complexity | Low complexity, rapid provisioning | High complexity, long deployment | Medium complexity, hardware logistics |
Now, let’s unpack cost, control, compliance and security considerations further.
Cost considerations
- Virtual data centres have low upfront costs as the infrastructure and hardware already exist. Ongoing spread costs into variable monthly fees.
- Physical data centres demand significant upfront investment with long ROI horizons.
- Colocation balances the two with moderate upfront hardware spend and ongoing hosting costs.
Control and scalability
- Virtual data centres provide the agility to scale quickly but limit hardware-level control.
- Physical deployments offer full control but limited flexibility to scale
- Colocation offers a balance, giving hardware control with outsourced facility management.
Compliance and security
- Virtual data centres rely on provider compliance frameworks.
- Physical and colocation environments provide stronger sovereignty and customisation, which are critical for regulated industries.
Find out how Interactive secures its data centre footprint.
Comparing the total cost of virtual, physical and colocation data centre models
At the end of the day, budget will play a role in your data centre decision. But each data centre model has different pricing structures, making it harder to compare costs like-for-like. Therefore, it’s best to frame the pricing conversation around Total Cost of Ownership (TCO), rather than what you’d have to pay upfront or every month based on your needs.
Virtual data centre costs
Most providers operate on a subscription model. Pricing scales with compute, storage, and bandwidth, though costs remain predictable. However, premium features such as advanced security, backup, or higher availability tiers add to the bill. To sum up, where virtual data centres win is their flexibility. As they don’t need physical infrastructure, they’re the cheapest to set up. And as cost scales by usage, it’s the most cost-efficient option for variable workloads.
Physical data centre costs
Physical builds carry heavy capital expenditure. Initial investments range from $50,000 to $500,000+, covering hardware, facilities, power, and cooling. Operating expenses include staff, maintenance, and upgrades. Over three to five years, the total cost of ownership can exceed millions depending on scale. This option only makes sense for hyperscale organisations or those with strict sovereignty requirements.
Colocation costs
Colocation pricing blends moderate monthly fees with one-time hardware purchases. Facilities typically charge extra for bandwidth, cross-connects, and power. Operating expenses cover space, power, cooling, monitoring, and management. While management costs are higher than a virtual model, organisations with high, consistent workloads find long-term operating expenses are lower. Compared to ‘pay-as-you-scale’ virtual data centres, managed colocation often recovers its investment over time and proves more cost-efficient.
So, what do the costs of each data centre model look like? Here’s a forward-looking TCO Summary
- Virtual: lowest upfront. OpEx model means costs scale with requirements.
- Colocation: moderate upfront with stable ongoing costs.
- Physical: highest upfront, long-term investment with slower ROI.
Australian Data Sovereignty and regulatory compliance
Key criteria for Data Centre choice
For many organisations, the ability to seamlessly and cost-effectively meet relevant compliance obligations is the key selling (or sticking) point when it comes to choosing a data centre model.
Key regulatory requirements for Australian organisations, and what they mean for their data centres.
Privacy Act & APPs (All industries): Applies to all businesses with turnover above $3 million. Requires strict data protection, breach notification, and consent management. Sensitive data such as health and financial records face additional obligations, with restrictions on cross-border transfers.
APRA CPS 234 (Financial Services): Applies to banks, insurers, and superannuation funds. Data must remain in Australia with strict incident reporting and security controls. Penalties can exceed $1.1 million. Colocation and physical facilities often provide inherent compliance advantages. Virtual providers must prove Australian data sovereignty ( as Interactive does)
My Health Records Act (Healthcare): Mandates that patient data stays in Australia. This necessitates sovereign infrastructure.
Government: Government agencies and contractors must comply with ISM and PSPF requirements. Defence-related workloads may also require security-cleared facilities.
The cost of compliance
Meeting sovereignty and compliance requirements can increase infrastructure costs by 15–25%. While that may seem steep, the penalties for non-compliance far outweigh this investment.
Each data centre model can assure compliance, but they do it differently. Virtual data centre solutions often provide compliance-as-a-service, while colocation ensures sovereignty through certified facilities. Physical data centres allow complete control but demand internal compliance management.
Whatever data centre model best meets your needs, you can rest assured that Interactive can offer a fully sovereign, compliant environment. Private, customisable data centre solutions such as Interactive’s private cage allow for even more control and assurance.
Read more about Australian data sovereignty
Making the data centre decision
The best data centre for your organisation will come down to technology requirements, growth plans, compliance requirements, and of course budget. To get a sense of what might work for your organisation, check out our data centre decision tool below:
Of course, there’s no “ideal” solution that suits every organisation with the same requirements. For example, even if you have the infrastructure and a strong IT team, there’s still a case for letting a service provider like Interactive do what they do best and manage the tech. That way, you can put your resources towards growth. Or, you can leverage Interactive’s sovereign, secure, virtual data centres to enjoy greater flexibility and scalability without compromising on compliance.
Future-Proofing your data centre infrastructure investment
As technology evolves, it will continue to demand more of your organisation’s data centres. So, future-proofing is a consistent challenge. The technologies your organisation should be preparing for include:
- Edge computing: moving workloads closer to users, from IoT sensors in logistics to smart factories in manufacturing.
- AI and machine learning: require high-performance infrastructure, GPU-enabled compute and scalable usage .
- 5G networks: increase the importance of low-latency data processing.
- Quantum computing: will demand new security frameworks within hyperscale data centre and virtual data centre services.
These horizons will soon be the foundation of Enterprise IT. How can you ensure your data centre investment is ready to implement them, efficiently and effectively?
Like most things, the best solution lies somewhere in the middle. Hybrid models combine the elasticity of virtual data centres with the sovereignty of colocation or physical environments. This approach spreads risk, reduces vendor lock-in, and optimises cost. Flexibility is also insurance against future redundancy. Contract clauses, standardised technologies, and migration planning reduce reliance on a single provider.
What else should you do today to ensure you’re well-placed to navigate future technology requirements?
Annual infrastructure reviews: reassess business needs, and your current infrastructure’s ability to deliver on them.
Technology refresh cycles: schedule upgrades proactively to avoid tech debt and performance gaps.
Scenario planning: model growth, regulatory shifts, and new workloads to stress-test your data centre strategy.
Create clear investment timelines: map CapEx and OpEx commitments against business milestones for predictability and agility.
Finally, CIOs should negotiate flexible contract clauses, including clear exit terms and data portability. Standardising on open technologies makes migrations less complex. Planning for data migration in advance, and using structured vendor evaluation frameworks, ensures managed colocation and virtual data centre services can adapt without restricting future innovation or choice.
Real-world examples: Virtual vs Physical vs Colocation
No matter what data centre model our customers choose, Interactive helps them make the most of it as their trusted technology partner.
Virtual Data Centre: Hollard Insurance
Forced to switch providers, Interactive helped Hollard Insurance migrate hundreds of virtual servers to a new data centre. Working to a tight deadline, Interactive’s strategic planning and expertise helped Hollard’s transition to a new virtual data centre environment seamless, and fully operational from day one. Read the full case study.
Managed Data Centre: Flight Centre
Flight Centre used a managed data centre model to balance global scalability with local compliance. The solution provided the sovereignty needed for APRA-regulated operations. Interactive’s managed data centre services allowed them to confidently outsource, minimising their business risk in the process. Read the full case study.
While Interactive’s data centre solutions offer organisations a modern, tailored plug-and-play solution, if you decide on (or decide to stick with) a physical data centre, you don’t have to go it alone. Interactive’s server support, maintenance and data centre care specialists can step in to bridge skills gaps and reduce the risks that come with self-managed infrastructure. infrastructure.
Still unsure? Book a data centre assessment
Let’s work together to take the uncertainty and guesswork out of your next data centre decision. Interactive’s data centre experts have the ability to offer a board range of managed data centre solutions, and the expertise to know what works for every unique environment. Our consultants can map your infrastructure goals against real-world cost and compliance models.
Contact us to learn more or book an assessment.
