We will examine the pros, cons and relative costs of the various options below.
There are several benefits in consolidating your servers, but the core benefit is the elimination of the waste represented by underutilized hardware. Before deciding whether or not a database instance should be consolidated, ask yourself this question: Are the available resources of the physical machine currently underutilized?
If SQL Server is using most or all of the available resources, there is little waste and the principle benefit of consolidation is not there. Consolidation is likely to lead to performance problems in the case of large, active enterprise databases.
No consolidation option enhances the power of the underlying hardware. In fact, virtualization adds a significant bit of overhead to further reduce the resources available to the virtual machines.
Here is what the Microsoft Licensing Update says about SQL Server in its October 2006 document Licensing Microsoft Server Products with Microsoft Virtual Server and Other Virtual Machine Technologies.
Portability is also much better with a virtual server. Backup and recovery of the complete virtual machine makes a virtual server portable and easy to set up elsewhere in the event of a disaster. Recovering named instances is more difficult and sometimes requires reinstallation and reconfiguration of the hardware and OS.
Both virtualization and named instances have a single point of failure in the underlying hardware. For example, if your motherboard goes bad, all of your database servers are down.
And of course, as in virtualization and named instances, the physical hardware has to be able to handle the increased load without performance degradation.