As evidenced by the Street’s excitement over the pending IPO for the EMC subsidiary VMware, virtualization is one of the hottest ideas in the enterprise software business. But the concept - which boils down to the idea that you can run servers much more efficiently by running multiple operating systems on the same machine - has potentially ominous consequences for the manufacturers of server hardware.

Bernstein Research analyst Toni Sacconaghi took a look at this issue in an eye-opening piece on Friday. He contends virtualization can allow enterprises to reduce their need for physical servers by a factor of five or more. Adoption of virtualization software, he says, “almost certainly will hurt x86 server demand.” He sees server shipments slowing in 207 and 2008, with modest contraction in 2009. “We expect the server installed base to barely grow beyond 2008, as increased virtualization largely provides the incremental capacity needed for new workloads,” he writes.

Sacconaghi thinks Dell will be the most affected by a slowdown in x86 server sales, particularly given its focus on low-end servers, where he expects virtualization to have its biggest impact. On the other hand, he thinks virtualization should boost demand for high-end servers, potentially benefiting IBM.

He also says the trend will accelerate the cannibalization of Unix servers by x86 servers, which is trouble for Sun Microsystems. He notes that Sun has more than 50% unit share of the Unix server market, and gets more than a third of its revenue from Unix servers.

Sun reports earnings today after the close.

Sun shares today are down 7 cents at $4.85; Dell is up 8 cents at $27.90.

Read the original, here.