Microsoft has recently unveiled how they view virtualization, and how they plan to make virtualization grow in the near future. More specifically, they've talked about what their primary goal is to oust VMWare from its comfortable 80% or higher lead in virtualization deployments.
It seems Microsoft's primary intention is not to directly compete with what VMWare is offering, and instead take the next technological step, moving to a management infrastructure that is both physical and virtual. They put a lot of emphasis on managing virtualization deployments, and see that as more important than the actual implementation. This is definitely true, at least from a business standpoint, as one of the goals of any virtualization suite is to become seamless.
If anyone knows how to operate a monopoly and control large market share, that would be Microsoft. VMWare could be in danger here. Even with a technically superior product, they might find themselves in a serious hurt if they do not react to Microsoft's plans, on top of several other vendors like Sun and Cisco competing for VMWare's current domain as well.