Corp. helped create the “neocloud” boom,g tens of billions of dollars in contracts with upstart data center operators in an effort to sate the crushing appetite for its cloud and AI services.

Now, as neocloud companies grapple with delays, regulatory snags and high costs, some key Microsoft leaders have developed a case of buyer’s remorse.

The company is tightening oversight of some data center projects from Nebius Group NV, IREN Ltd., and Nscale Plc, stepping away from ones it deems risky and debating internally whether to ink new neocloud deals, according to people familiar with the matter.

The friction was on display during Microsoft’s most-recent earnings call, when Chief Financial Officer Amy Hood said that delays in the delivery of some third-party capacity was disrupting the company’s spending plans. It was the third time she has called out such issues on an earnings call.

Some of the recent hiccups involved issues with cabling at a site in Texas being developed by IREN, according to people familiar with the situation. Data center servers are connected by intricate networks of fiber-optic cables. IREN, an Australian firm that pivoted from cryptocurrency to AI in 2023, also suffered a generator fire at the campus in April and disclosed hardware delivery delays there in August.

IREN and Microsoft officials met last week and negotiated a revised timeline that may push back the site’s completion by several weeks or months, according to people familiar with the events.

Microsoft manages relationships with infrastructure partners “against our requirements and customer demand, including monitoring delivery and adjusting plans when circumstances change,” a company spokesperson said. “These are normal and responsible practices for managing large, complex infrastructure projects, and they help us bring capacity online reliably and efficiently.”IREN declined to comment.

Shares of IREN and Nebius both fell about 20% on Thursday amid a broader selloff of AI infrastructure stocks.

It’s a perilous moment for the neoclouds, which were created to capitalize on a shortage of computing power by speeding up the deployment of artificial intelligence infrastructure, including chips from Nvidia Corp.

Industry analyst Gartner Inc. recently estimated that 80% of neocloud providers could be consolidated or closed by the end of the decade. Elon Musk — whose SpaceX also sells computing power — offered a similarly bleak outlook of “guppy-level death” for many neoclouds because they’re struggling to raise sufficient funds to operate.

These fears were compounded after a series of victories this week by Democratic candidates for governor, who made more aggressive data center regulation a central part of their campaigns. Texas Governor-elect Gina Hinojosa in particular has called for an immediate moratorium on data center development until more thorough regulation is established.

Microsoft was the nascent industry’s most crucial early patron, providing the likes of CoreWeave Inc. and Nscale with massive contracts that let them get big quickly. Even though Microsoft has a huge fleet of data centers, it was willing to pay up to meet demand it couldn’t handle on its own.

“We’ve had to pinch our nose and borrow GPUs from some of our competitors,” Microsoft Executive Vice President Mat McBride said of the company’s neocloud deals during a conference hosted by Evercore in June. “We’ve done that because we have a very, very strong demand signal.”Each week, CFO Hood chairs a meeting about computing capacity – when it’s coming online, from where and which part of the company will get it. A common point of discussion at these sessions is whether the neoclouds’ timelines are credible and what Microsoft can do to accelerate them, according to people who’ve been involved with the meetings.

Increasingly, Microsoft is putting boots on the ground. In recent months, the company has dispatched workers to neocloud sites to make sure facilities are being built to its specifications and following regulations, according to job listings and people familiar with the matter. For example, Microsoft sent workers to a Nebius site in New Jersey that was fined $1 million for running generators without permits. Microsoft has also sent people to projects in Texas being built by Nscale and IREN.

In other cases, Microsoft is walking away from sites it no longer considers tenable, including multiple Nscale projects. It declined to expand its deal with Nscale in Texas, and some of that capacity ended up being taken by Figure AI. Microsoft also stepped away from a letter of intent to lease 1.35 gigawatts from the company in West Virginia.

And last month it cancelled a roughly $3 billion Nscale deal tied to a UK data center owing to multiyear delays in getting grid power, according to people familiar with the deal. Nscale said at the time that the UK withdrawal didn’t impact its other deals with Microsoft.

The Information and Financial Times previously reported some details of Microsoft’s IREN and Nscale deals.

Microsoft is currently focused on expanding its own data centers rather than adding new neocloud deals, according to those who’ve spoken with leaders inside the company. The company hasn’t entirely sworn off new neocloud deals, but many company leaders express strong reluctance, the people said.

Over the last year, Microsoft has added more than $200 billion of new data center lease commitments. Some of this includes neocloud capacity, according to a spokesperson. All of this spending is being directed toward major expansion of its own server farm capacity in the coming years, Bloomberg previously reported.

Buying third-party computing capacity was always controversial at Microsoft. Executives were concerned that even partial outsourcing would help prop up would-be competitors. They also fretted that Microsoft would be exposed to higher costs and execution risks because neoclouds had limited experience building and operating server farms.

Some of the competition fears came true: CoreWeave hired a handful of key executives from Microsoft, then did a deal directly with close partner OpenAI last year. This rankled many leaders inside Microsoft, according to employees who were present at the time. A CoreWeave spokesperson said that Microsoft was one of its first partners and collaborators, “and we continue to have a great relationship.”Nebius has been unusually upfront with its competitive strategy.

It will scale up by inking contracts with big customers like Microsoft or Meta Platforms Inc. knowing that they’ll abandon neoclouds in the long run, Nebius CEO Arkady Volozh said during a March conference hosted by Morgan Stanley.

“We treat this business as temporary,” Volozh said, referring to his company’s deals with customers like Microsoft and Meta. “They just cannot cope with the speed now — that’s why they’re outsourcing.”Meanwhile, demand for computing power remains much higher than supply — and is expected to for the foreseeable future. So even if Microsoft decides not to sign new neocloud deals, Anthropic PBC and Alphabet Inc.’s Google have been accelerating their own commitments to the upstart data center operators.