Example:
a) 1 x Large Server + VMware licenses
-or-
b) N x Small Servers
If b) is more cost-effective then VMWare definitely dropped the ball here...
One of the key advantages of VMWare from a operational point of view is the management capability, which is either much better than what most people have for physical hardware or much cheaper. Even with this new licensing model, VMWare still offers a positive ROI for a large customer, since that customer would also need to buy more licenses for products like IBM/Tivoli, CA Unicenter, BMC, etc. Those products are mega-buck, and enterprise customers are/were realizing cost savings by getting rid of them.
It's hard to see this from a small/mid-size enterprise perspective. Imagine $2M in recurring licensing charges and $750k in annual consulting expenses for a product functionally similar or inferior to Nagios. Or spending $20M annually on maintenance on software that you don't use. This happens every day in the Fortune 500 and government spaces.
I'd say a 1:3 ratio of sysadmins to servers is actually pretty common -if- the sysadmins also do desktop support for the organization. At one of my ISP jobs the customer/production servers had a 1:50 or so ratio (but a lot of time was spent on new products/features, maintenance could easily have been 1:200 and our automation was mediocre) but the internal IT dept was around the 1:3 mark.
And he said "IT is just me and another guy", not "systems is just me and another guy", so I suspect that's the case for him.
I mean, going from 0 physical servers to 1 physical server is a pretty big marginal jump; you need someone who knows how to replace drives and deal with other hardware problems, and you need that person on pager.
But that person is going to spend a few days getting the thing set up, then maybe they will touch the hardware once a year ongoing. (as you scale up you can lower the setup time to a few minutes per server by using cobbler or another auto-provisioning setup, which is probably going to take a few days to set up in and of itself. After that, you can bank on spending some significant time every time you buy a different hardware configuration, but either way, most of the time spent on hardware will be when setting up.)
Adding more servers just means you have to run down and replace those drives more often; but like I said, if you have to physically touch each server more than once a year or so, something is seriously wrong.
(I'm sole sysadmin for a search engine, and I handle 200 servers.)
If you run out of one of these your choices are a) consolidate (which may imply virtualization) or b) relocate (which is astronomically expensive to do with no downtime).
That's why people will spend money on VMware.
Certainly smaller hosts with DR capability can be done for lower capital spend, but you need more capable admins to manage it. VMWare does that for you out of the box.
I.e., VMWare is usually a better deal, but just barely. Drives me insane.