Microsoft to cut neocloud partners, favor own data centers

Microsoft ↘ 0.99% is cutting back the number of neocloud providers it works with. The company plans to rely on a few key suppliers and put more into its own data centers, CNBC reported on Friday, November 6, citing people familiar with the matter. The pullback comes as the AI infrastructure market faces rising borrowing costs, heavy debt loads and worries that the buildout may slow.cnbc.com

In recent years Microsoft has signed deals with neoclouds including CoreWeave ↗ 6.28%, Nebius ↗ 7.58%, Chronoscale, IREN ↗ 20.02%, Lambda and Nscale. Two sources told CNBC that the company is still evaluating its options and hasn't decided which providers to drop. One of them said Microsoft wants to prioritize its own data center footprint.cnbc.com

Oracle deal winds down

Two people also said Microsoft chose not to renew a deal with Oracle ↗ 0.82%, according to CNBC. Bloomberg, which reported the plans first, said Microsoft has spent recent months switching off computing capacity it rented from Oracle. The capacity no longer fit Microsoft's specifications and ran on older-generation Nvidia ↗ 2.78% chips. The two companies announced the deal in 2023 to supply computing power for an AI-assisted version of Bing. An Oracle spokesperson said demand for its AI infrastructure is still strong, including for earlier-generation GPUs, Investing.com reported. Oracle shares fell in afternoon trading after the news, while Microsoft's stock barely moved.sg.finance.yahoo.com+3

A Microsoft spokesperson said the company's infrastructure strategy is "built on flexibility and choice." The spokesperson added that Microsoft combines owned data centers, leased sites and third-party partners, and that "we regularly review these investments against customer demand," according to CNBC.cnbc.com

Strain across neoclouds

Shares of CoreWeave, Nebius and IREN have each lost roughly half their value over the past month, even after rallying on Friday, CNBC noted. In its Thursday earnings report, IREN said Microsoft asked for a networking upgrade that pushes capacity delivery to January or February. Microsoft has already walked away from a planned Nscale site in England and chose not to renew an Nscale contract in Texas. Bloomberg separately reported that Microsoft leaders are reluctant to sign new neocloud deals, though Anthropic and Google, owned by Alphabet ↗ 0.78%, have been increasing their commitments to these providers.finance.yahoo.com+1

The shift reverses Microsoft's rush toward neoclouds after ChatGPT launched in 2022. In its IPO filing, CoreWeave said Microsoft accounted for 62% of its 2024 revenue. On IREN's earnings call, co-CEO Daniel Roberts said the questions from capital markets have "moved from how big the contract is to whether it can be delivered, financed, and run at a profit," CNBC reported.cnbc.com