I'd never heard of VPS, but it seems to be all the rage in the web hosting business--and rightfully so. VPS gives you root access to your own virtual Linux machine, so you get just about all of the control and flexibility of running your own physical server: you can add your own Apache modules, install new languages (like Ruby!), run a J2EE app server, provide IMAP access, schedule jobs, create users... whatever.
Unlike running your own physical server, though, VPS is dirt cheap. We're talking $20/month cheap, compared to $10 for shared hosting and, say, $100 for a dedicated server (and that's not counting the cost of the server itself!). I'm guessing most VPS hosting companies deploy dozens if not hundreds of virtual Linux instances on each skinny little 1U server; the incremental cost of each additional VPS account follows the economies of shared hosting, not the economies of dedicated servers.
The downside, of course, is that you don't get a 2.6GHz of that Xeon and all 4GB of fancy ECC RAM all to yourself--you have to share it with all the other customers on that particular server. Really, though, how many sites need more than 2% (on avg) of a modern server's CPU time?
Every VPS provider I've seen also throws in friendly web-based control panel software that make it easy for you to play webhost to your friends or customers--just a few clicks through a wizard interface and the software automatically configures a new virtual host in Apache, creates the appropriate FTP, shell, and e-mail accounts, and makes the relevant changes to the VPS provider's DNS servers. Luckily, VPS providers generally don't charge you per virtual host, and many don't set any artificial limit on how many virtual hosts you can have.
As of tonight I'm running Resin (with jikes and JDK 1.4.2) on my VPS. I'm planning to run an rsync daemon for backup purposes. mod_python came pre-installed, but not mod_ruby, which I'll have to remedy. It still amazes me that I can say all that about a $20/month account!
Frankly, I don't see why any serious web developer would get a traditional web hosting account these days--VPS gives you so much for so little, it's too good a deal to pass up!