I don't understnad if I have hardware that has a 5% utilization rate then just add more apps to this server instance itself - instead of loping off another x percent for the virtualization software to run an entire new instance of the OS?
Imagine you're running Exchange and a web server on the same machine. If a patch comes out for Exchange that requires a reboot, you have to take down the web server unnecessarily.
With virtual servers, you can keep separate applications in separate VMs, thus improving availability. Plus you know with absolute certainty that the Exchange patch won't break the web server since they are running on separate (albeit virtual) machines.
Virtualization is very, very cool indeed!