As Microsoft struggles on the virtualization front, VMware is expanding its offerings by tapping the software as a service model.

As of June 6, it's offering hosted service providers a way to license its VMware Infrastructure Suite as a monthly subscription based on the actual number of virtual machines that are running.

Under typical hosting service agreements, a customer has to pick a number of servers for a three-year agreement and pay for them, whether they are used or not, said Bogomil Balkansky, senior director of product marketing at VMware. With VMware's Service Provider Program, hosted service suppliers will be able to offer virtual servers to customers.

The arrangement will allow hosted service providers to take a step toward utility computing, where their customers pay for only the resources needed at the moment, not the maximum number of servers that might be needed to meet a peak load.

Hosted service providers will be better able to make use of their own resources, renting capacity on the same server to different customers. Each virtual machine is isolated from the data and applications of the others. One may crash and the others on the same physical server keep running, Balkansky explained in an interview.

VMware is offering service providers its virtualization suite, VMware Infrastructure, which includes its ESX hypervisor for hosting multiple virtual machines and the Distributed Resource Scheduler. The scheduler reacts to increased demand in a data center by moving virtual machines to underutilized hardware, Balkansky said. VMware expects offering virtual machines as a hosted service will expand the market for its virtualization products. Microsoft in contrast said May 11 that it was reducing the number of features it had planned to include in its upcoming Viridian hypervisor. VMware, a unit of storage vendor EMC Corp., plans to offer 10% of its common stock in in a future IPO.

Another virtualization vendor, start-up Trigence, is hammering away on the idea that you can virtualize the application rather than virtualize operating systems with applications at the server level, as VMware and Microsoft and the open source code Xen hypervisor do.