In 2006, many enterprise IT groups saw the potential in virtualisation, 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 virtualisation to control server and storage sprawl and tame data centre power costs.

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 virtualisation capabilities built in, negating the need for some additional software, said Clay Ryder, president of analyst The Sageza Group. Sun Microsystems' Solaris 10 OS includes a virtualisation feature it calls “containers”. And Microsoft is expected to release a beta version of Windows Virtual Server in the first quarter of 2007 and ship it a year later.

This activity is good news: As virtualisation features become part of the hardware or the OS, software providers will have to offer useful extra features, Ryder said, such as automated new software testing or security patch management.

Virtual Iron introduced Version 3.1 of its virtualisation platform in December for a license price of $499 (£255) per socket – compared to $2,875 per socket for a comparable VMware licence. XenSource also introduced new virtualisation products at sub-$1,000 prices.

Both XenSource and Virtual Iron build their proprietary products on top of the open-source Xen platform for virtualisation 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, said Guy Churchward, vice president and general manager of the Java Runtime Products Group at BEA. Initially, Liquid VM will work only with VMware's ESX Server hypervisor.

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

"To really make virtualisation 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 said, noting that virtualisation needs to be applied to storage, networking and the introduction of new software, not just servers.

Mike Williams, CIO for the US Defence Contract Management Agency (DCMA), learned a lesson about thinking strategically when he did a virtualisation project in 2006. (The DCMA, a federal Department of Defence agency, places contract managers inside companies fulfilling defence 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 centres to three from 17. But that move taxed the wide area network (WAN) when all the network traffic converged on the three data centres. His advice: Optimise the WAN first.

Still, Williams likes the results. Before virtualisation, DCMA replaced about one-third of its 560 servers annually at a cost of about $2 million, Williams said virtualisation cut that expense to $560,000 (£286,035).