I'm not sure how you are figuring out that it costs more to license vmware than it does to build physical servers. I only have the scenarios that I've worked with but I've found that virtualization licensing still is significantly cheaper than physical servers and provides benefits that physical boxes don't provide natively (HA, DRS, FT, Hardware/Software separation, etc...)

If I were to buy a VMware box now, maxing out the licensing as it stands, I would purchase a server with 2 of Intel's E7 processors (10 procs per core) with 192 GB of RAM. Licensing for this box would cost somewhere in the neighborhood of $9k to $10k list (with one year of support). At an average of 4GB of RAM per server (not over committed) in theory I can get 48 VMs per physical box. Since I'm running my clusters redundantly and need to leave at max 1/3 of capacity free to handle loss of a node we will reduce that to 31 VMs. Let's then say, for the sake of argument, that we buy super cheap physical boxes for servers and they cost $2k a piece. With 31 virtual server capacity it would cost us $62k in physical hardware to replicate what I have with $10k in licensing and maybe $15-20k for phsyical hardware. So at that base alone we see a difference of around $30k in favor of VMware. Add in the management tools like vCenter (one time purchase) and we will say $20k less to virtualize. We still aren't anywhere near what we would need to do this environment physically and haven't factored in power, cooling, colo costs for rack space, etc... Even with the new pricing scheme they are (more than most companies can say) saving organizations money and reducing management costs. Sure there are cheaper alternatives, and they should be considered, but VMware seems to be the one who is innovating (like the new SDRS to name one recent advancement) and everyone else is chasing. If you don't need those features, or access to them quickly, you could consider xenserver, hyper-v, paralells, kvm or any of the many other alternatives out there. When delivering scalable and solid virtualization infrastructures, I find that you get what you pay for...

I've been managing ESX environments for over 6 years now and the change makes complete sense to me. VMware based their initial licensing on the number of processor cores in a box. This made sense when we were putting 16, 32 or 64 GBs of ram into a 2 or 4 core box. At max we were seeing 32 GBs of RAM per core and VMware found a price point that worked under this model. With changes in technology (mainly memory virtualization in the Cisco UCS platform) we are now seeing 100s of GBs per core and less total cores due to the expanding number or processors we can fit on a chip. Simply put, we used to get x number of VMs per core license. Now we are getting 4 to 10 times that many per license. That's a losing equation for any licensing scheme and they needed to make changes. All of that said I was on the initial bandwagon of outrage when the news came out. The starting point for vRam entitlements as well as some of the other changes were concerning. Realizing that now single VMs could cost thousands just in VM licensing was not appealing and had me second guessing whether or not VMware was the platform of the future. After seeing the recent changes they've made to the licensing scheme (upping vRam entitlements, maxing out vRam counts on individual machines, pooling, and soft limits) I feel the changes are completely reasonable/understandable considering how things have changed for virtualizing systems. I'm sure many will disagree but I still don't feel like VMware is gouging anybody...