Traditional devices aren't designed to deal with the micro-granularity and high churn that cloud environments require of them.

When cloud architects speak of network virtualization they are typically referring to overlay-based network virtualization. Network virtualization delivers network services in a more scalable, manageable, and fault-tolerant manner than traditional networking can deliver. This high level of integration and automation reduces operating costs.

Network services such as virtual switching, routing, and firewalling can happen in software at the “edge” of the network. The equipment only needs to be configured once, on installation of the cloud.

Network Virtualization Key to IaaS Clouds from Virtualization Review