A large flat layer 2 network is the key to a new unified fabric data center. The idea is that everything in the data center - servers, appliances and storage - should be part of one big flat layer 2 structure.
Server virtualization is the big reason for going flat. The big benefit of a flat network is its flexibility. A layer 2 network is plug and play, requiring no reconfiguration or change in IP addresses when resources move. This makes implementing server virtualization easier with less chance for configuration errors, and moves the data center closer to becoming a cloud.
The only way this can work is that the new flat can't be like the old flat. What needs to change is the old Spanning Tree algorithm because it created scaling problems. Spanning Tree is inefficient because it doesn't use all the available paths between switches and the routes are not always the shortest or fastest.