Microsoft is scaling back its partnerships with neocloud providers as it shifts focus to its own data centers and a select group of suppliers. The company has been evaluating which neoclouds to discontinue, according to sources familiar with the matter. Microsoft recently opted not to renew a deal with Oracle, and it has already reduced its work with U.K.-based Nscale due to electricity access issues.
The move comes as the neocloud sector faces significant challenges, including rising borrowing costs, high debt levels, and concerns about the sustainability of rapid infrastructure expansion. Shares of major neoclouds like CoreWeave, Nebius, and IREN have plummeted by roughly half over the past month, despite a rally on Friday. Industry experts predict many of the 323 neoclouds currently operating may not survive.
IREN reported a 16% surge in its shares on Friday after revealing that its AI revenue more than doubled to $200 million in the latest quarter. However, IREN co-CEO Daniel Roberts acknowledged the growing scrutiny from capital markets, which are now questioning not just the size of contracts but also their deliverability, financing, and profitability. Microsoft's finance chief, Amy Hood, noted on an earnings call in October that some cloud contracts involving graphics processing units were delayed until the first half of 2027, impacting Azure cloud growth.
Microsoft's spokesperson emphasized that its infrastructure strategy is built on flexibility and choice, combining owned data centers, leased facilities, and partnerships. The company reported $45.2 billion in capital expenditures and finance leases during the latest quarter, with plans to accelerate spending in the second half of the fiscal year. The shift in strategy reflects a normal review process for managing large, complex infrastructure projects, according to Microsoft.