Cloud providers face new headwinds: Reports say Microsoft (MSFT.US) plans to reduce partner list and build its own data centers

According to English-based financial media Zhitong Finance APP, sources revealed that Microsoft (MSFT.US) plans to reduce its list of Neocloud partners, instead choosing to focus on a select group of key vendors and build its own data centers. The software giant’s plan presents yet another potential challenge to the emerging Neocloud sector, which is already showing signs of pressure due to rising borrowing costs, heavy debt burdens, and concerns about a possible slowdown in new data center construction.

In recent years, Microsoft has established partnerships with several emerging Neocloud vendors, including CoreWeave (CRWV.US), Nebius (NBIS.US), Chronoscale, IREN (IREN.US), Lambda, Nscale, and Oracle (ORCL.US). Oracle is actively investing in building AI infrastructure.

Two sources familiar with the matter said Microsoft is currently in an evaluation phase and has yet to determine which Neocloud providers it may discontinue using. One of them stated Microsoft intends to prioritize its own data center deployment. Two other people said Microsoft chose not to renew an agreement with Oracle.

A Microsoft spokesperson said in an email statement that its infrastructure strategy “is built on flexibility and choice.” The spokesperson added: “We combine Microsoft’s own data centers, leased facilities, and strategic collaborations with third-party vendors to deliver the required capacity wherever and whenever customers need it. We regularly review these investments based on customer needs, monitor delivery, and adjust our plans as circumstances evolve.”

Emerging Neocloud Sector Under Pressure

In recent weeks, shares of new Neocloud vendors have been volatile, as rising interest rates have heightened concerns about many companies’ heavy reliance on debt while rapidly building out capacity. Over the past month, CoreWeave, Nebius, and IREN have each seen their share prices drop by about half, despite a rebound on Friday.

A recent industry assessment counted 323 emerging Neocloud companies, with experts predicting many of them will not survive.

In its Thursday earnings report, IREN said it had transferred data center capacity to Microsoft in August, but Microsoft requested an upgrade to network equipment, which means the facility will go live in January or February next year rather than this year.

Microsoft CFO Amy Hood said during the company’s Q1 earnings call in October that several Neocloud contracts involving GPUs had been delayed to the first half of 2027, affecting Azure cloud growth. Microsoft reported total capital expenditures and finance leases of $45.2 billion in the latest quarter, and said capital expenditures would accelerate in the second half.

CoreWeave and Nebius both plan to announce quarterly results next week. IREN shares jumped 16% on Friday after the company reported that AI revenues more than doubled from the previous quarter to $200 million. IREN Co-CEO Daniel Roberts stated, “There is a disconnection between what we see in the public markets and what we see at the customer level.”

He acknowledged the challenges posed by the market environment. On the earnings call, Roberts said, “In the past few weeks, capital markets have become more selective, and questions have undoubtedly shifted from deal size to whether we can deliver, finance, and run profitably.”

Microsoft Adjusts Partnership Strategy

Microsoft has cut back on its partnership with UK-based emerging Neocloud provider Nscale, abandoning previously planned sites in England. Darren Hardman, Microsoft UK and Ireland CEO, said in October that the decision was related to Nscale’s ability to secure power.

This week, reports emerged that Microsoft decided not to renew its Texas contract with Nscale. Nscale filed for an IPO in mid-September but has not updated its prospectus since. In its IPO documentation, the company stated it expects Microsoft to be a “significant customer” in the future.

Microsoft’s major shift toward emerging Neocloud providers occurred after the launch of ChatGPT in 2022, when demand for GPUs surged. Microsoft signed a deal with CoreWeave, which at the time was a privately held startup that began as a crypto mining operation. When CoreWeave went public last year, it noted that 62% of its 2024 revenues were to come from Microsoft.

At the time of ChatGPT’s launch, OpenAI relied exclusively on Azure. Today, the company’s cloud providers also include Amazon (AMZN.US), Cerebras, CoreWeave, Google (GOOGL.US), and Oracle.

A Microsoft spokesperson said the review of Neocloud investments is “the normal and responsible way to manage large, complex infrastructure projects,” and added, “the pace at which we reach new agreements reflects our current needs.”