New cloud vendors face another headwind: Rumor has it that Microsoft (MSFT.US) plans to reduce the list of partnerships and build its own data centers

The Zhitong Finance App learned that people familiar with the matter said that Microsoft (MSFT.US) plans to reduce its new cloud service provider (Neocloud) partner list and instead focus on cooperating with a few key vendors and building its own data center. The software giant's plans will pose another potential challenge to the new cloud service provider sector. The sector is showing signs of pressure due to rising borrowing costs, heavy debt burdens, and market concerns that construction may slow down.

Microsoft has established relationships with many new cloud service providers in recent years, including CoreWeave (CRWV.US), Nebius (NBIS.US), Chronoscale, IREN (IREN.US), Lambda and Nscale, and ORCL.US (ORCL.US). Oracle is investing in AI infrastructure.

Two people familiar with the matter said that Microsoft is currently in the evaluation stage and has not decided which new cloud service providers it will stop using. One of them said that Microsoft wants to prioritize the layout of its own data center. Two other sources said that Microsoft chose not to renew an agreement with Oracle.

A Microsoft spokesperson said in an emailed statement that its infrastructure strategy was “built on flexibility and choice.” The spokesperson said, “We combine Microsoft's own data centers, leased facilities, and strategic partnerships with third party vendors to deliver the capacity customers need when and where they need them. We regularly review these investments based on customer needs, including tracking delivery and adjusting plans as circumstances change.”

The new cloud service provider sector is under pressure

Stock prices of new cloud service providers have been volatile in recent weeks, as rising interest rates have heightened concerns that many companies are overreliant on debt in the process of rushing to build production capacity. Shares of CoreWeave, Nebius, and iREN all fell by about half over the past month, despite a rebound on Friday.

A recent industry assessment counted 323 new cloud service providers, and experts predicted that many of them would not survive.

IREN said in Thursday's earnings report that it handed over data center capacity to Microsoft in August, but Microsoft requested an upgrade of network equipment, so the infrastructure will be launched in January or February next year instead of this year.

Microsoft Chief Financial Officer Amy Hood said during the company's first fiscal quarter conference call in October that some cloud contracts involving GPUs have been postponed to the first half of 2027, which will affect Azure cloud growth. Microsoft reported that total capital expenditure and financial leases for the latest quarter were 45.2 billion US dollars, and indicated that capital expenditure will accelerate in the second half of the year.

Both Coreweave and Nebius plan to announce quarterly results next week. IREN shares rose 16% on Friday after the company said AI revenue had more than doubled from the previous quarter to $200 million. IREN Co-CEO Daniel Roberts said, “There's a disconnect between what we see on the open market and what we see at the customer level.”

He acknowledged the challenges posed by the market environment. Roberts said on the earnings call: “The capital market has become more selective in the past few weeks. The question has undoubtedly moved from how big the contract is to whether it can be delivered, whether it can be funded, and whether it can operate profitably.”

Microsoft adjusts cooperation strategy

Microsoft has cut cooperation with Nscale, a new British cloud service provider, and abandoned the site it originally planned to use in England. Microsoft UK and Ireland CEO Darren Hardman said in October that the decision was related to Nscale's ability to obtain electricity.

It was reported this week that Microsoft has decided not to renew its contract with Nscale in Texas. Nscale submitted a listing application in mid-September, but has not updated its prospectus since then. The company said in its IPO documents that Microsoft is expected to become an “important customer” in the coming period.

Microsoft's big shift to a new cloud service provider occurred after the launch of ChatGPT in 2022, when demand for GPUs surged. Microsoft signed up to CoreWeave, which at the time was a private startup whose business began with cryptocurrency mining. When CoreWeave went public last year, it said 62% of its 2024 revenue came from Microsoft.

When ChatGPT was released, OpenAI only used Azure. Now, the company's cloud vendors also include Amazon (AMZN.US), Cerebras, CoreWeave, Google (GOOGL.US), and Oracle.

A Microsoft spokesperson said that the way to review investments by new cloud service providers is “a normal and responsible way to manage large, complex infrastructure projects,” adding that “the speed with which we have reached new agreements reflects our needs today.”