Microsoft Wednesday changed the upcoming service pack for Virtual Server 2005 into an entirely new product release that will now carry a licensing fee for some, but the company reaffirmed that the software would still ship by the end of the year.

At Intel’s Developer Forum, Microsoft said what was once called Virtual Server 2005 Service Pack 1 is now being renamed Virtual Server 2005 R2. Virtual server technology lets multiple operating systems, called guests, run on one physical machine with a single host operating system. Virtual Server 2005 runs Windows Server 2003 as its host operating system.

Microsoft uses the R2 nomenclature to signify an interim product upgrade, which means that users without Software Assurance support contracts will not be getting the Virtual Server upgrade for free. The same is true for the upcoming R2 version of Windows Server 2003.

While Virtual Server 2005 Service Pack 1 would have been made available at no cost via download, users without service contracts will now have to buy a entirely new license for R2. Microsoft did not say what the cost would be for that license.

Microsoft officials said they considered the free vs. cost issue and found that the majority of Virtual Server 2005 customers were on support.

“We agonized over that question,” says Zane Adam, director of marketing for the Windows server division. “Since this product sells in the enterprise segment and has only been out since October the potential of a having a large customer base looking for service pack 1 is not really existent. If this was a two- or three-year cycle we would have suffered a bit more.”

Adam confirmed that the feature set for this next release of Virtual Server has not changed since service pack 1 was introduced in April, but said Microsoft strengthened its long-term commitment to invest in and continue developing Virtual Server even though basic virtualization technology will be added into the Longhorn server operating system.

In April, Microsoft CEO Steve Ballmer said, “Virtualization is an area of intense interest and activity for us. Driving virtualization is a key technology to facilitate better compatibility and lower total cost of ownership.” He called virtualization a major area of investment for Microsoft.