New cloud providers face another headwind: Microsoft Corporation (MSFT.US) reportedly plans to reduce its partner list and build its own data centers.

People familiar with the matter said that Microsoft Corporation (MSFT.US) plans to reduce its list of neocloud partners, shift focus toward working with a small number of key suppliers, and build its own data centers. The software giant's plan will pose another potential challenge to the neocloud sector. The sector is already showing signs of strain due to rising borrowing costs, heavy debt burdens, and market concerns that construction may slow. In recent years, Microsoft Corporation has established relationships with a number of neocloud providers, including CoreWeave (CRWV.US), Nebius (NBIS.US), Chronoscale, IREN (IREN.US), Lambda and Nscale, as well as Oracle Corporation (ORCL.US). Oracle Corporation is investing money to build AI infrastructure. Two people familiar with the matter said that Microsoft Corporation is currently in an evaluation phase and has not yet decided which neocloud providers it will stop using. One of them said that Microsoft Corporation wants to prioritize its own data center footprint. Two other sources said that Microsoft Corporation has chosen not to renew an agreement with Oracle Corporation. A Microsoft Corporation spokesperson said in an emailed statement that its infrastructure strategy is "built on flexibility and choice." The spokesperson said: "We combine Microsoft Corporation's own data centers, leased facilities, and strategic partnerships with third-party suppliers to provide customers with the capacity they need, when and where they need it. We regularly review these investments based on customer demand, including tracking deliveries and adjusting plans as circumstances change." Neocloud sector under pressure In recent weeks, neocloud stocks have been volatile, as rising interest rates have intensified concerns that many companies are overly reliant on debt while rushing to build capacity. Over the past month, shares of CoreWeave, Nebius and IREN have each fallen by about half, despite a rebound on Friday. A recent industry assessment counted 323 neocloud providers, with experts predicting that many of them will not survive. IREN said in its Thursday earnings report that it handed over data center capacity to Microsoft Corporation in August, but Microsoft Corporation requested upgrades to networking equipment, causing that infrastructure to come online in January or February next year rather than this year. Microsoft Corporation Chief Financial Officer Amy Hood said on the company's fiscal first-quarter conference call in October that some cloud contracts involving GPUs were delayed to the first half of 2027, which will affect Azure cloud growth. Microsoft Corporation reported total capital expenditures and finance leases of US$45.2 billion in the latest quarter and said capital expenditures will accelerate in the second half. CoreWeave and Nebius both plan to report quarterly results next week. IREN shares rose 16% on Friday after the company said AI revenue more than doubled from the previous quarter to US$200 million. IREN co-CEO Daniel Roberts said, "There is a disconnect between what we see in the public markets and what we see at the customer level." He acknowledged that the market environment poses challenges. Roberts said on the earnings call: "Capital markets have become more selective over the past few weeks, and the question has undoubtedly shifted from how big the contract is to whether it can be delivered, whether it can be financed, and whether it can be operated profitably." Microsoft Corporation adjusts partnership strategy Microsoft Corporation has scaled back its partnership with UK neocloud provider Nscale, abandoning a site originally planned for use in England. Microsoft Corporation UK and Ireland CEO Darren Hardman said in October that the decision was related to Nscale's ability to secure power. Reports this week said that Microsoft Corporation decided not to renew a 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 filing that it expects Microsoft Corporation to become a "significant customer" in future periods. Microsoft Corporation's major shift toward neocloud providers occurred after the release of ChatGPT in 2022, when demand for GPUs surged. Microsoft Corporation signed with CoreWeave, which was then a private startup whose business began with cryptocurrency mining. When CoreWeave listed last year, it said that 62% of its 2024 revenue came from Microsoft Corporation. When ChatGPT was released, OpenAI used only Azure. Now, its cloud providers also include Amazon.com, Inc. (AMZN.US), Cerebras, CoreWeave, Alphabet Inc. Class C (GOOGL.US) and Oracle Corporation. A Microsoft Corporation spokesperson said that the approach to reviewing neocloud investments is "the normal and responsible way to manage large, complex infrastructure projects," and said that "the pace at which we are reaching new agreements reflects our needs today."