Finally Microsoft takes a clear and official position about application of Windows licensing on virtual machines hosted on 3rd party virtualization platforms (including hardware virtualization solutions like VMware ESX Server or VMware Server and OS virtualization solutions like SWsoft Virtuozzo).

In a brand new whitepaper Microsoft covers all these scenarios, including special features like VMware VMotion and client-side licensing terms, detailing:

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If you have assigned a single license of Windows Server Standard Edition to the server running ESX, then you may run one instance at a time of Windows Server Standard Edition. If you have assigned a single license of Windows Server Enterprise Edition to the server running ESX, then you may run up to four instances at a time of Windows Server. You may not run a fifth instance under the same Enterprise Edition license because that right requires that the fifth instance be running hardware virtualization software and software managing and servicing the OSEs on the server. However, Datacenter Edition permits unlimited running of instances in virtual OSEs.

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VMotion, System Center Virtual Machine Manager, and Windows Server Clustering all move instances of virtual OSEs between physical servers. However, the licenses remain with the physical server to which they are assigned. When an instance is moved to a new physical server, the new server must have the appropriate licenses.

With a few exceptions, described in the box to the side regarding PUR, software licenses may only be reassigned to new hardware after 90 days. However, the dynamic movement of virtual OSEs between licensed servers is not restricted in any way. As long as the servers are licensed-and are not running more instances simultaneously-you are free to use VMotion and System Center Virtual Machine Manager to move virtualized instances between licensed servers at will...

The most interesting part anyway is a final comparison chart between VMware ESX Server, SWsoft Virtuozzo and Microsoft Virtual Server, where appears VMware ESX Server is less expensive than competitors when using Windows Server 2003 Standard Edition, and has equal costs when you adopt Enterprise or Datacenter editions (which are preferred choice for virtualization deployments):

Microsoft already exposed its licensing strategy more clearly with launch of Virtualization Calculator 2.0, few weeks ago, but customers were still missing an official document to refer to.

Highly recommended reading before starting any virtualization project. Read it at source.