I always prefer installing web scripts on my own web server rather than using an externally-hosted service. I can integrate the authentication, look and feel, and features with the rest of my site. Our intranet stays consolidated — users have one place to go to access all of our web services. We view no advertisements.
For many types of software, the free, open-source options are just as good as the externally hosted ones, free or paid. phpBB is as good as most commercial bulletin boards. Moodle is as good as Blackboard or WebCT. WordPress has as many features as commercial blogging sites. Elgg provides many of the same features as MySpace or Facebook.
Usually, new technologies appear first on commercial sites, and then the open-source world catches up. Sometimes, the lag time is very short, as with blogging and bulletin board software. Other times, the lag time is much longer. The longest delay I can think of is with photo gallery software. Gallery and Coppermine are both very solid, but they lack the tagging and Flash features of Flickr. When will they catch up? Photo galleries are key for an intranet community, taking advantage of the visual medium of a computer screen more than other types of social software. Though both support keywords, captions, and descriptions, allowing anyone to tag a photo simplifies and broadens participation in the process of mining a photo collection for useful purposes.
Another example is del.icio.us, which does not really have an equivalent in the intranet software world. I would love to give a school community the ability to tag web sites anywhere but keep the database internal to the school. Yes, we could preface every del.icio.us tag with our school name, but internal processes are easier to train, customize, and keep free of external noise.
Let me know if you come across open-source Web 2.0 photo gallery or tagging software.