It depends. For most people's websites and webservers, local is best. I use both. I have a box that is just a database server in my office (to test remote connections) but usually I am developing on a machine with it on localhost. (Either via WAMP or a custom FreeBSD I use to boot from thumbdrive.)
However, there are cases where you have to scale. My day job's site currently is on a cluster. It has 4 webservers on a load balancer connected to a MySQL database (a rather beefy Quadcore machine with 8GB of ram), a seperate file server, an Xserve for Quicktime media streaming, and two boxes that just handle email. (One from the server and one for us employees). (Also we have another box as a backup on standby incase the main database fails for whatever reason. Fortunatelly that is all done through a managed service. We pay out the rear for it, but not as much as it would cost to open our own datacenter and hire a full time networking staff. Maybe someday, but for now we're just working on the programming and business development side of things.
Granted, We're average a concurrent server load of between 2500 - 12000 users at any given time. So it's a little different situation.
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