It's one of those things I see a lot but never really think of. Do you think for the purpose of web application development (specifically ASP.NET WebForms/MVC). Do you think it's advantageous to do such a thing and if so, what kind of advantages come out of it?
By virtualization I mean using products like Hyper-V to separate the server context like your SQL and Web Server, etc.
One big advantage I see is, that every developer can have his/her own sandbox to work on. If someone messes up his/her sandbox he/she can take a clean image and all is OK again. So I guess that means that there is room to experiment without losing valuable time getting back to the normal setup, you can simply do a rollback.
I'm in doubt a bit on whether you should use virtualisation for production environments. Depending on the application of course.
The only time I would use a virtual for ASP.Net development was if the app required specific setup, such as relying on installed software, wierd settings or particular shares. Every developer has their own webserver and can run their own database so if it's a "basic" webapp I don't see much value in virtuals.. it's pretty hard to break anything with a basic web app deployment :)
First question is, virtualization of what? Do you mean server virtualization? Do you mean running VMWare on each dev's laptop with multiple OSes? Do you mean moving everything to the cloud?
Virtualization of servers, in web app context, is not really different from that in general IT - most of the servers on the Internet, including StackOverload's, are bought to handle peak loads and spend most of the time idling away the cycles, so virtualizing them makes sense when you have more than a certain amount.
VMWare on the desktop (or other parallels on other operating systems) is superb because a) your devs can run a full instance of your server environment, including multiple virtual servers connnected in a virtual network - this is about as close to the real thing that you can get, minus hardware costs and minus devs messing with each other's servers. For clients, you can use Linux and multiple Windows installs to test various browsers, font sizes, etc. quickly - also a big win.
Moving everything to the cloud makes sense in many cases, but is probably a topic for a separate full-sized question :)
In a development environment a virtual environment is useful to put serveral different servers on one box, you can have an instance for your web app, one for your services, one for database, etc. That way it mimics your production environment if you are using separate servers.
One of the benefits of using virtualization in production is that your application is not tied to a specific machine. If you wanted to move your web server instance to another box, it is trivial to do so. You don't need to install or configure things on the new server and hope that everything is set up properly.
One problem I have had though in testing virtual instances is that it can run slower for some applications, specifically engineering apps that like running the CPU at 100%. So test before you leap.
With a virtual server, you can test your code in a production-like environment. It is also possible to quickly revert back to the original setup. For many applications, it is useful in that time period just after you write the code, but before it goes to production.
I'm a fan of virtualizaion and use it in testing and production (VMWare and Hyper-v) but over the last year I find it less important on a dev machine. TFS provides me with all the backup/rollback ability that I need, multiple versions of .net can now exist on the same machine and VS2008 can target all those versions.