Virtualization describes a class of software applications and modules that creates and presents hardware-like resources to other software modules, applications and operating systems. These software applications, that look like hardware computers are typically called virtual machines or VMs. The virtualization concept applies in similar ways to computer storage, networking and other computer hardware resources. Virtualized computers, storage and networks are fundamental technologies for cloud computing.
The functionality offered by virtualized commuters includes the following:

• Better utilization of hardware resources - For example, if only ¼ of the capacity of a physical computer is used at any one time, the virtualization software can create and present four virtual machines all of which use that one physical computer. For all practical purposes, the IT Administrator has four identical, but less powerful computers at her disposal. Since these virtual computers are created via software, they are very easily configured. Depending upon the IT Administrator’s needs, he can choose to use between one and four of the virtual machines at any one time. Organizations that have variable needs during the day can take advantage of this. For example, Netflix could use fewer, but more powerful VMs to load new movies during the day, but use many more less powerful VMs at night to support all the people viewing their movies.

• Higher Availability - When a virtual machine software application is shutdown, it can be saved as a computer file. Like any computer file, it can be copied, duplicated and backed-up. A copy of a virtual machine file can be used on any physical machine. When a physical computer fails, the virtual machines currently running on that computer can be restarted on another using a backup of the VM file. Many virtualization software products automate failure detection and the restarting of VMs on another physical computer. Often times this can be done fast enough so that the applications and users are not interrupted. The IT Administrator can repair or replace the broken physical hardware at a more leisurely pace.

• Easier hardware upgrades - The IT Administrator can replace old physical hardware with new hardware. All she needs to do is setup and test the new hardware and then simply move the VMs running on the old hardware to the new hardware. Like the higher availability scenario above, this often can be done with interruption.

• Easier Capacity Management - When more capacity is required, the IT Administrator adds the new hardware and using the copied VM files, runs more VMs.

For more information:

• VMware is a leading provider of Virtual Software.
  
• Linux based Virtual Machines exist too
  

• A basic, but still somewhat geeky description of Virtual Machines