Microsoft plans to use fewer neocloud partners as AI growth shows strain

Consolidating the cloud footprint

Microsoft is currently in the evaluation stage of its neocloud partnerships, with plans to shrink its roster of external suppliers. The company intends to prioritize its own data center footprint as it manages the massive infrastructure requirements for artificial intelligence. This shift marks a move toward more direct ownership of the hardware and facilities used to power its services.

The software giant has previously forged relationships with several neoclouds, including CoreWeave, Nebius, Chronoscale, IREN, Lambda, and Nscale. It also maintained a relationship with Oracle, which has been investing heavily in AI infrastructure. However, Microsoft is now looking to streamline these connections to focus on a few key suppliers.

A Microsoft spokesperson stated that the company's infrastructure strategy is built on flexibility and choice. They explained that they combine owned data centers, leased facilities, and strategic partnerships to meet customer demand. The company regularly reviews these investments to adjust plans as circumstances change.

Market strain and rising costs

The neocloud market has experienced a turbulent period on Wall Street recently. Rising interest rates have fueled fears that many companies took on excessive debt to rush their capacity buildouts. These concerns have led to a more selective environment for capital markets, where investors are questioning the profitability of new projects.

The financial impact is visible in the stock performance of several neocloud providers. Shares of CoreWeave, Nebius, and IREN have all fallen by roughly half over the past month, despite some recent rallies. Experts have noted that out of 323 neoclouds identified in a recent industry review, many may not survive these difficult market conditions.

IREN co-CEO Daniel Roberts noted that there is a disconnect between public market sentiment and actual customer demand. He observed that questions from the market have shifted from the size of a contract to whether the infrastructure can be delivered, financed, and run at a profit. This indicates a cooling period for the rapid expansion seen in previous years.

Specific deal adjustments

Microsoft has already begun making concrete changes to its neocloud arrangements. The company opted not to renew a deal with Oracle and has walked away from a site with the U.K.-based neocloud Nscale. The decision regarding Nscale was reportedly tied to the provider's ability to secure necessary access to electricity.

The Financial Times reported that Microsoft also decided against renewing a contract with Nscale in Texas. This is notable because Nscale's IPO filing expected Microsoft to be a significant customer in future periods. The company has not updated its prospectus since filing to go public in mid-September.

Other projects have also faced delays due to infrastructure requirements. IREN reported that it handed over capacity to Microsoft in August, but Microsoft requested a networking equipment upgrade. This request means the infrastructure will come online in January or February instead of the original year-end goal.

The shift toward internal growth

Microsoft's initial pivot to neoclouds followed the 2022 launch of ChatGPT, which triggered a massive surge in demand for graphics processing units (GPUs). During that period, Microsoft sought out partners like CoreWeave, a startup with roots in cryptocurrency mining. CoreWeave reported that 62% of its 2024 revenue came from Microsoft at one point.

While Microsoft continues to work with various suppliers, including Amazon, Cerebras, Google, and Oracle, the focus is shifting. Microsoft reported $45.2 billion in capital expenditures and finance leases during the latest quarter. The company stated that this spending will accelerate during the second half of the fiscal year.

The company's finance chief, Amy Hood, noted that some cloud contracts involving GPUs were delayed until the first half of 2027. These delays have directly affected the growth of the Azure cloud. By focusing on its own data centers, Microsoft aims to manage these complexities and ensure it can deliver capacity where and when customers need it.