Most games use a dedicated server application. This program collects data from players and distributes it to other players. This is more efficient and effective than a peer-to-peer arrangement, but it requires a separate computer to host the server application. The additional computer is a server.
Network bandwidth, in particularly upstream bandwidth is often one of the major limitations in hosting game servers. Home broadband Internet connections rarely provide the necessary upstream bandwidth to host dedicated game servers with more than 4-10 clients.
In the past, this is how the majority of game servers were hosted. This was the only option. The player would buy the game, and most households only had one computer, so the player would use this one machine host his or her server and play the game on, often simultaneously. The stress on the computer was enormous, and game performance was proportionately poor. Even if the bandwidth on the newest broadband Internet services could keep up with the load, the computer itself was still behind in computing the data needed. Process data for 3D graphics, game physics, sorting and distributing network data to the other players on one computer, places considerable demands on servers.
A professional server is a computer to read data and transmit vast amounts of data as fast as players need it. A handful of game hosting pioneers realized the need for such systems. They purchased rack mounted server machines and colocated them within datacenters to host their games. They paid between $200 and $700 a month for this luxury, and the teams that could foot such bills were few and far between, but these setups significantly improved the gameplay. Within a few years online multiplayer gaming became a huge success. Prices have lowered dramatically and subscribers increased 1000 fold.