Microsoft narrows neocloud ties as it invests more in its own data centers

What Microsoft is doing

Microsoft is trimming the number of neocloud providers it uses and shifting emphasis toward a few key suppliers alongside building out its own footprint, according to people with knowledge of the talks. The company is still evaluating which providers to keep and hasn't finalized decisions. One person said the priority is expanding Microsoft-run capacity.

Bloomberg previously reported on the effort. Two people also said Microsoft declined to extend its arrangement with Oracle.

The spokesperson called the review "a normal and responsible way to manage large, complex infrastructure projects," and said "the pace of our new agreements reflects what we need today."

Who could be affected

In recent years, Microsoft's roster of neocloud partners has featured CoreWeave, Nebius, Chronoscale, IREN, Lambda and Nscale, as well as Oracle, which is investing aggressively in AI infrastructure. Microsoft has already pulled back from Nscale in the U.K., walking away from a site it planned to use in England. Darren Hardman, Microsoft's CEO for the U.K. and Ireland, told CNBC in October the move related to Nscale's access to power.

According to the Financial Times this week, Microsoft decided not to renew a contract with Nscale in Texas. Nscale sought to go public in mid September and hasn't updated its prospectus since; its IPO filing said it expects Microsoft to be a "significant customer in future periods."

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Microsoft's heavier use of neoclouds followed the late 2022 debut of ChatGPT, which sparked a rush for GPUs, the chips that train and run AI models. As part of that pivot, Microsoft signed CoreWeave, then a privately held startup with roots in crypto mining. After CoreWeave listed last year, the company disclosed that 62% of its 2024 revenue was from Microsoft. Meanwhile, OpenAI now taps multiple clouds, including Amazon, Cerebras, CoreWeave, Google and Oracle.

Market fallout and timing

Neocloud names have swung sharply as rising rates and leverage worries meet a fast buildout. Shares of CoreWeave, Nebius and IREN have fallen by about half in the past month, even after a Friday bounce. An industry count identified 323 neocloud companies, and observers expect many will not make it.

In its Thursday earnings release, IREN said it handed off Microsoft-bound data center capacity in August, but because Microsoft requested a networking upgrade, the go-live was delayed to January or February rather than occurring this year. On Friday, IREN shares rose 16% after the company said AI revenue rose to $200 million, more than twice the prior quarter's level. IREN co CEO Daniel Roberts told CNBC there is a "disconnect between what we're seeing in public market and what we're seeing at the customer level." On the earnings call he added, "Capital markets have become more selective in the last few weeks, and the questions have undoubtedly moved from how big the contract is to whether it can be delivered, financed, and run at a profit." CoreWeave and Nebius report next week.

Spending and what it means for investors

On Microsoft's October fiscal first quarter call, CFO Amy Hood said some cloud contracts tied to graphics processing units were pushed to the first half of 2027, weighing on Azure growth. Microsoft logged $45.2 billion in capital expenditures and finance leases in the latest quarter and said spending will pick up in the back half of the fiscal year.

Why does that matter? It signals Microsoft is tilting toward owned capacity while keeping options open with select partners, which could reshuffle who captures AI infrastructure revenue and when. Watch the timing: IREN's August handoff, January to February activations, and next week's updates from CoreWeave and Nebius are fresh checkpoints for how this capacity shuffle is unfolding.

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