In 2006, many enterprise IT groups saw the potential in virtualization, rushed to consolidate servers and subsequently propelled VMware software to a market-leading spot. As 2007 begins, VMware's prices are under attack, just as more CIOs look to virtualization to control server and storage sprawl and tame data center power costs.

For starters, VMware rivals XenSource and Virtual Iron Software have launched new open-source alternatives, undercutting VMware on price. Also, new processors, such as IBM's Power 5 and upcoming Power 6 chips, and new operating systems have virtualization capabilities built in, negating the need for some additional software, says Clay Ryder, president of The Sageza Group. Sun Microsystems' Solaris 10 OS includes a virtualization feature it calls Containers. Microsoft is expected to release a beta version of Windows Virtual Server in the first quarter of 2007 and ship it a year later.

That's good news: As virtualization features become part of the hardware or the OS, software providers will have to offer useful extra features, Ryder says, such as automated new software testing or security patch management.

Virtual Iron introduced Version 3.1 of its virtualization platform in December for a license price of $499 per socket--compared to $2,875 per socket for a comparable VMware license. XenSource also introduced new virtualization products at sub-$1,000 prices.

Both XenSource and Virtual Iron build their proprietary products on top of the open-source Xen platform for virtualization hypervisors. (A hypervisor lets a computer run multiple operating systems at once.) VMware's products are not based on open source.

Meanwhile, middleware vendor BEA Systems is making its own cost-cutting move. In the first half of 2007, BEA plans to release WebLogic Server Virtual Edition (WLS-VE), a version of its Java application server that includes Liquid VM--a BEA-specific Java Virtual Machine that lets Java applications run directly on a hypervisor without requiring an operating system to be present. This will let users substantially reduce the amount of computer power, lowering the hardware costs per application, says Guy Churchward, vice president and general manager of the Java Runtime Products Group at BEA Systems. Initially, Liquid VM will work only with VMware's ESX Server hypervisor.

Analysts advise CIOs planning for virtualization in 2007 to think strategically, not just tactically.

"To really make virtualization work you want to do it so end users access capability, not just specific machines," Ryder says. "That's only going to be possible if you take a strategic approach," he says, noting that virtualization needs to be applied to storage, networking and the introduction of new software, not just servers.

Mike Williams, CIO for the Defense Contract Management Agency (DCMA), learned a lesson about thinking strategically when he did a virtualization project in 2006. (The DCMA, a federal Department of Defense agency, places contract managers inside companies fulfilling defense contracts for weapons systems, jets, military equipment and parts.) Williams deployed VMware, reducing the agency's number of servers to 160 from 560 and the number of data centers to three from 17. But that move taxed the WAN when all the network traffic converged on the three data centers. His advice: Optimize the WAN first.

Still, Williams likes the results. Before virtualization, DCMA replaced about one-third of its 560 servers annually at a cost of about $2 million, Williams says; virtualization cut that expense to $560,000.