According to people familiar with the matter, Microsoft is reducing its list of neocloud partners, shifting its focus to a few key suppliers instead, and continues to expand its own data centers.
The plans of this software giant may bring new challenges to a corner of the artificial intelligence market. Recent signs of pressure have emerged in this field, due to reasons including rising borrowing costs, heavy debt burdens, and concerns from the outside world that the pace of expansion may slow down.
In recent years, Microsoft has established cooperative relationships with several neocloud, including CoreWeave, Nebius, Chronoscale, IREN, Lambda, and Nscale. Oracle, which is also making significant investments in the infrastructure construction of AI, is also among them.
Two people familiar with the matter said that Microsoft is still in the evaluation phase and has not yet decided which neoclouds it will stop using. Due to the confidentiality of the related negotiations, both individuals requested to remain anonymous. One of them stated that Microsoft prefers to expand its own data center infrastructure as a priority. Bloomberg has previously reported on this plan. The two sources also mentioned that Microsoft has chosen not to renew an agreement with Oracle.
A Microsoft spokesperson stated in an email statement that the company's infrastructure strategy "is built on flexibility and choice."
"We combine Microsoft's own data centers, leased facilities, and strategic partnerships with third-party providers to provide the required capacity at the locations and times needed by our customers," said the spokesperson. "We regularly review these investments based on customer needs, including tracking delivery progress and adjusting plans as circumstances change."
In recent weeks, neocloud has experienced significant fluctuations in its trading performance on Wall Street. With rising interest rates, there are concerns in the market that many companies are over-reliing on debt as they compete to expand their computing power. The stock prices of CoreWeave, Nebius, and IREN have all fallen by about half in the past month, although they rebounded on Friday.
A recent industry review counted 323 neocloud. Experts predict that many of these companies will have difficulty surviving.
IREN stated in its financial report released on Thursday that it delivered the data center capacity to Microsoft in August, but Microsoft requested an upgrade of the network equipment, which resulted in the launch of the related infrastructure being postponed from this year to January or February next year.
Microsoft Chief Financial Officer Amy Hood stated during the financial report conference call for the first quarter of the software company's fiscal year in October that some cloud contracts involving graphics processors were postponed to the first half of 2027, which affected the growth of Microsoft's Azure cloud business. Microsoft announced the latest quarterly capital expenditure and financing lease amount of $45.2 billion and indicated that capital expenditure will accelerate in the second half of this fiscal year.
The capital market is "more picky"
CoreWeave and Nebius both plan to announce their quarterly results next week. IREN's stock price rose by 16% on Friday, following the company's announcement that AI revenue more than doubled from the previous quarter, reaching $200 million. IREN Co-CEO Daniel Roberts stated to CNBC: "There is a disconnect between what we observe in the public market and what we see at the customer level."
However, he also acknowledges the challenges brought about by the market environment.
Roberts said during the financial report conference call: "In the past few weeks, the capital market has become more discerning. The focus has undoubtedly shifted from the size of the contracts to whether the projects can be delivered, whether they can raise funds, and whether they can operate profitably."
Microsoft has significantly reduced its cooperation with the British company neocloud, abandoning a site it had planned to use in England. Microsoft's CEO for the UK and Ireland, Darren Hardman, stated in October to CNBC that this decision was related to the company's ability to obtain electricity.
The Financial Times reported this week that Microsoft has decided not to renew a contract with Nscale in Texas. Nscale submitted a listing application in mid-September, but has not updated its prospectus since then. The company stated in a IPO document that it expects Microsoft to become an “important customer” in the future.
Microsoft made a major shift towards neocloud, which began after the release of ChatGPT in 2022, when there was a surge in demand for GPU. In search of other supply sources, Microsoft signed a contract with CoreWeave; at that time, the company was still a private startup with origins in cryptocurrency mining. When CoreWeave went public last year, it stated that 62% of its revenue for 2024 came from Microsoft.
At the time of the release of ChatGPT, OpenAI only used Azure. Today, the company's cloud service providers also include Amazon, Cerebras, CoreWeave, Google, and Oracle.
A Microsoft spokesperson stated that the company's approach to investing in neocloud is "a normal and responsible practice for managing large, complex infrastructure projects," and added that "the pace at which our new agreement is being advanced reflects our current needs."
CNBC's Kif Leswing also contributed to this report.
View:Co-CEO of IREN stated that despite intensified scrutiny from investors, demand for AI remains strong.
