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The error occurs if the ESXi host already has the vmservice-vswitch, and the vmservice-vmknic-pg portgroup is binded to an IP address other than 169.254.1.1.
To resolve the issue, change the IP address to 169.254.1.1:
  1. On the vCenter, click the ESXi host.
  2. Click the Configuration tab.
  3. Under Hardware, click Networking.
  4. Click Properties under vmservice-vswitch.
  5. Click vmservice-vmknic-pg and then click Edit.
  6. Go to the IP Settings tab.
  7. Set the IP address to “169.254.1.1” and the subnet mask to “255.255.255.0”.
  8. Click Okay and then close the Switch Properties window.
The error will no longer appear during ESXi preparation.