Intel’s Nehalem Xeon processor launch March 30 could potentially make Intel a leader in the hardware virtualization space and spur more virtualization projects, but it’s not likely to sell any more server hardware. That could be bad news for server vendors such as Dell, Hewlett-Packard and IBM.

IT solution providers that sell into large businesses are eagerly awaiting the arrival of servers based on Intel’s Nehalem Xeon server microprocessor because it is built with virtualization in mind, but they aren’t expecting the technology’s arrival to boost server sales.

Intel’s new microarchitecture, which builds a memory controller right onto the chip, and the additional memory channels available in this new CPU are a couple of the features that make the microprocessor the best x86 hardware available for virtualization. Intel first released the microarchitecture in processors for PC workstations last year.

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“[Intel’s Nehalem EP] positions Intel to be the virtual host platform of choice,” says Mike Healey, CTO of Greenpages Technology Solutions, a Microsoft Gold Partner.

But when you put the worst recession in 50 years together with the rise of virtualization, the combination spells disaster for anyone relying on server hardware sales to make a living.

“The release of [Intel’s Nehalem Xeon processor and servers based on it] won’t boost hardware sales,” says Healey. Rather, because of the improved virtualization enabled by Nehalem, “people are now going to be selling two servers instead of 10.”

Pricing will be the key for Intel to make a strong play with Nehalem, according to Healey. That’s because Intel’s greatest competition in the server processor space will not be from its processor rival Advanced Micro Devices. Rather, it will be from Intel’s previous-generation server processors.

Nehalem will enable more virtual servers to reside on a single physical server. So pricing must not be at such a premium that it is less expensive for customer organizations to stick with the previous-generation processor.

If Intel plays its cards right, servers based on Nehalem processors will become the requested server of choice in the third quarter, according to Healey.

“Virtualization is not recession-proof,” says Healey. “But the ROI you can get from virtualizing is sharpened and enhanced in the recession.”