No matter what the official version says, the Red Hat virtualization strategy has always been problematic.

It started in December 2004, when the company revealed the plan to adopt the open source hypervisor Xen as virtualization engine for its enterprise operating system Red Hat Enterprise Linux (RHEL) 4.0.
Unfortunately such plan didn't become reality earlier than two years later, when Red Hat finally released RHEL 5.0 with Xen in March 2007.

In mid 2006, being already in late, the company decided to play an interesting game: it declared Xen immature and accused its main competitor, Novell, for being irresponsible in integrating Xen in its enterprise distribution (SUSE Linux).
Probably to support such claims, Red Hat did its best to ship RHEL 5 with a minimal, under any enterprise standard, GUI for Xen: Virtual Machine Manager.

After that, a series of dramatic events happened.
First Microsoft signed a series of alliances with the some of the key Xen contributors: with XenSource, with Novell and with Virtual Iron. Then Citrix acquired XenSource in August 2007.

So, in less than one year Red Hat lost much of its capability to influence the Xen development despite it contributes to the open source project since the early beginning.
It was easy to guess that the company would quickly evaluate an alternative. And the only valuable alternative for Red Hat was KVM, the young virtualization platform that was included in the Linux kernel after just six months of development.

KVM offers a lot of advantages to Red Hat.
For example it ships as an official kernel module, avoiding major investments in maintaining it.
For example Novell is not using it and it's unlikely to do so for a while (it has too much to do with Microsoft and Citrix right now).
For example it brings a new powerful allied, IBM, which clearly has no more interests in heavily investing in Xen.
For example its inclusion in the kernel makes very hard for Microsoft, its allied, or any other uncomfortable player to influence its development.

So yesterday Red Hat did the much expected move to announce the adoption of KVM.

The company will offer a new lightweight distribution which integrates KVM, selling it as the Red Hat virtualization platform (Embedded Linux Hypervisor).
Additionally, the company will offer a new enterprise-wide management solution called oVirt, which is based on the standardized libvirt APIs and is designed to scale up to thousands of virtual machines.

What happens to Xen now? What happens to the Red Hat investment on it?
The official press announcement don't say it explicitly but the choice of words lets clearly understand that Xen is the past and KVM is the future.
It's unknown if Red Hat will continue to support Xen or what will happen to those enterprise customers that adopted RHEL 5 to use the hypervisor (mostly because Xen and KVM virtual machines are incompatible).

In any case it's unlikely that Red Hat will drop Xen tomorrow: the company sits in the Xen advisory board and its support policy implies that any distribution must be supported for seven years.
Red Hat may want to spend this time convincing its customers that KVM is a better virtualization engine: Virtual Machine Manager, for example, has been already re-categorized as a desktop user interface for managing virtual machines.

Both the Embedded Linux Hypervisor and the oVirt management console are already available in beta here.

Red Hat didn't mention when both products will be available as RTM.