Prior to virtualization, servers were dedicated to particular tasks. Every new application would require the acquisition of one or more new servers. In a large data center, this would ultimately lead to proliferation of servers, and the models and configurations of the hardware would change over time. There was no easy way to scale up applications which needed more hardware horsepower, short of migrating to a new server, and, more commonly, no easy way to take advantage of unused horsepower for servers that largely sit idle.
Every new server demands more resources to keep it alive, including power, connectivity, backup, and management. As the number of servers grow, so does the need for more racks, more floor space and more air conditioning in the server room.
Virtualization means the end of one-to-one mapping of servers and services. A server can hold multiple operating systems on the same hardware, and multiple instances of applications to facilitate management.
The collapse rate is the ratio of servers before and after virtualization. Government Computer News claims a ratio of 20:1, that is the retirement of 19 out of 20 servers when virtualization is implemented. Your mileage may vary, but the ongoing operations savings could be significant.
Virtualization also offers more portability. Once you are operating in a virtual server environment, your applications are less tightly bound to your particular physical servers and easier to move to a new server or even a new hosting facility.
Microsoft has launched new virtualization products, including Windows Server 2008 Hyper-V.
Here is a video introduction of the product.