microsoft The company is shrinking its roster of neocloud partners as it focuses on working with a few major suppliers and building out its own data centers, according to people familiar with the matter.
The software giant’s plans pose new potential challenges to a corner of the artificial intelligence market that is showing signs of strain due to rising borrowing costs, high debt levels and worries that growth will slow.
Microsoft has developed relationships with a number of neoclouds in recent years, including: coreweave, Nevius, chrono scale, Airenas well as Lambda and Nscale. oracleis pouring money into building AI infrastructure.
Microsoft is currently in the evaluation phase and has not decided which neoclouds to discontinue, two people familiar with the matter said, asking not to be identified because the talks are confidential. One of the people said Microsoft wants to prioritize its data center footprint. Bloomberg earlier reported on the plan. Two people said Microsoft has chosen not to renew its contract with Oracle.
A Microsoft spokesperson said in an emailed statement that the company’s infrastructure strategy is “built on flexibility and choice.”
“We combine Microsoft-owned data centers, leased facilities, and strategic partnerships with third-party providers to deliver the capacity our customers need, where and when they need it,” the spokesperson said. “We regularly review these investments in response to customer demand. This includes tracking delivery dates and adjusting plans as circumstances change.”
Neocloud trading has been roiled on Wall Street in recent weeks as rising interest rates have fueled concerns that many companies have become too reliant on debt in their rush to ramp up production capacity. Shares of CoreWeave, Nebius and IREN have all fallen by about half over the past month, even after Friday’s gains.
A recent industry review counted 323 neoclouds, and experts predict that many will not survive.
IREN said in its earnings call Thursday that it handed over data center capacity to Microsoft in August, but that Microsoft required upgrades to its network equipment, resulting in the infrastructure coming online in January or February rather than this year.
Microsoft’s finance chief Amy Hood said during the company’s fiscal first quarter earnings call in October that some cloud contracts, including graphics processing units, have been delayed until the first half of 2027, impacting Azure cloud growth. Microsoft reported $45.2 billion worth of capital expenditures and finance leases in its latest quarter and said capital expenditures would accelerate in the second half of the fiscal year.
Capital markets are “more selective”
Both CoreWeave and Nebius are scheduled to report quarterly results next week. IREN stock soared 16% on Friday after the company said AI revenue more than doubled from the previous quarter to $200 million. “There’s a disconnect between what we’re seeing in the public markets and what we’re seeing at the customer level,” IREN co-CEO Daniel Roberts told CNBC.
However, he acknowledged the challenges posed by market conditions.
“The capital markets have become more selective in recent weeks, and the question has certainly shifted from contract size to delivery, financing and whether we can operate profitably,” Roberts said on an earnings call.
Microsoft has already cut back on its work with UK-based neocloud Nscale and pulled out of a site it had planned to use in the UK. Darren Hardman, Microsoft’s CEO for the UK and Ireland, told CNBC in October that the decision was related to Nscale’s access to power.
The Financial Times reported this week that Microsoft has decided not to renew its contract with Texas-based N Scale. Nscale filed to go public in mid-September, but has not updated its prospectus since then. The company said in its IPO filing that it expects Microsoft to be a “significant customer in the future.”
Microsoft’s big move into neocloud came after the launch of ChatGPT in 2022, which led to a surge in demand for GPUs. Microsoft looked elsewhere and signed on with CoreWeave, a privately held startup with roots in crypto mining at the time. When CoreWeave went public last year, it said 62% of its 2024 revenue would come from Microsoft.
At the time of ChatGPT’s release, OpenAI was exclusively using Azure. The company’s cloud suppliers now also include Amazon. cerebrumCoreWeave, Google, Oracle.
A Microsoft spokesperson said the company’s approach to reviewing its neocloud investments is “a normal and responsible way to manage large, complex infrastructure projects” and that “the pace of new contracts reflects what is needed today.”
—CNBC’s Kif Leswing contributed to this report.
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