Virtualization is efficient mainly because in most server environments a lot of your hardware is sitting idle. Virtualization allows you to have more than one virtual guest per physical host to take advantage of this idle power. This has numerous benefits for efficiency, in terms of power, performance, cost, and staffing:
- Consolidating several servers down to one machine eliminates some energy waste powering the core hardware on each additional machine. There are now fewer things like fans and disks to keep spinning.
- Your purchasing strategy can now take this into account, as you look for fewer, larger, more powerful general purpose servers rather than smaller, single-use servers. This allows you to consolidate servers even further, increasing saving from the previous point even more. Over time it will also help push an economy of scale towards these servers that used to be considered high-end, making them more affordable for everyone, and saving on things like manufacturing and shipping overhead.
- Hardware and operating system manufactures now take virtualization into account in their designs (mainly via implementation and support for VT-x), allowing you to share resources among machines. For example, if you have 3 instances of the exact same operating system as virtual guests loaded into RAM on the same physical host, certain parts of each operating system that will remain the same may be able to be shared among all three, allowing you get more work out of the same hardware and consolidate even further.
- Virtual machines are easier to manage and maintain, because you have a standard virtual hardware environment. Need to retire an old server and migrate to a new one? No big deal - just copy over your virtual hard drives, change a few settings to point to the new location, and you're ready to go. The operating systems themselves don't know they've been moved, taking half of the work out of the process. This kind of benefit has the potential to create huge efficiencies in terms of IT staffing.
- All this consolidation further reduces the need for IT staffing, as there are now many fewer physical servers to manage.
I know that a lot of this sounds like it might only help in shops with lots and lots of servers, but as a smaller example where I work at the start of last year we had 14 physical servers, and by the end of next year I hope to have us down to just 5. This includes 3 instances of things that don't do always as well virtualized: a gateway appliance, sql server, and domain controller. That means I will have consolidated 11 servers that I used to have to manage down to just 2 (with an eye to adding a third to provide some more room and redundancy).
Just about anyone needing at least 3 servers (and between domain controller/authenication/basic network services, file, print, e-mail, database, and applications, most every business of any size does) should see some benefit from consolidating down to 2 — though I'd always keep at least 2 for redundancy reasons - if one goes down you the remaining server can limp along carrying the full load, albeit slowly, until you can bring the other one back online.
I bolded one of my bullet points, because it's one that I think the OP missed and explains how virtual machines also result in increased performance.