Lots of discussion lately about the need for virtualization in a cloud computing context. On one side you have people saying it's not necessary and adds extra complexity, on the other you have people (vendors) saying that virtualization is inherently a cloud infrastructure. Some even go as far as saying that virtualization and cloud computing are one in the same. I'm here to tell you that neither is true. My position is Virtualization Doesn't Make the Cloud, it makes the cloud better. Sure, you could manage raw servers Google style, but why? For me, it comes down two main aspects of scale, scaling up, and scaling out.
First let's look at scaling out, or to scale horizontally which basically means to add more nodes to a distributed system, such as adding a new servers or storage (which is easier). These could be in the form of physical or virtual servers. An example might be scaling out from one web server system to many dedicated slaves machines. Google has made an art form of scaling out. They have data centers around the globe geared toward this one core task - just in time hardware provisioning, but for most this is a very difficult and costly endeavour. Virtualization makes this sort of instant replication & provisioning of many virtual machines much easier.
Next is scaling up or the ability to scale vertically which means adding resources to a single server in a distributed system. Typically this involves the addition of CPUs or memory to a single virtual server in the form of Virtual CPU and RAM. Unlike a physical server, in a virtual environment you can change your virtual hardware characteristics, a physical server is what it is. You run at it's maximum potential limiting it's ability to easily scale up. If you need more scale you need more hardware or have to manually add more components to the physical server (RAM, CPU, storage, etc), which means downtime while the servers are upgraded. In virtual environment this isn't a limitation and can often be done on the fly.
Vertical scaling of existing systems also enables you to better leverage Virtualization technology because it provides more resources for the hosted Operating system and Applications that can share these resources in a multi-tenant environment. Virtualization also allows for more automated programmatic control of the system resources in correlation to the demands placed on the infrastructure or application being hosted. This is because in a virtual infrastructure you are not managing any actual physical components but instead virtual representations of them.
So it is very true that virtualization isn't a requirement of a cloud infrastructure, it just makes it a heck of lot easier to manage and scale out or up or both.