Co-location refers to the number of systems that can operate in close proximity to one another. ‘Close’ means within communication range. The key is that from a co-location perspective you usually do not want the systems to be able to exchange data with one another.
A classic example is wireless keyboard and mouse systems in an office environment. There may be dozens of systems within about 10 meters of one another–well within the range at which they can communicate. The requirement is for each keyboard and mouse to be able to exchange data with its own PC, but they should not send data to any other PCs in the office. It would be very problematic if one person typed on his keyboard but the characters showed up on the screen of another employee a few desks away.
In addition to preventing the separate systems from exchanging data with one another, it is also important that the systems not interfere with one another, causing loss of data or excessive retries.