Microsoft has reportedly decided not to exercise an option to more than double its existing agreement with UK-based AI cloud provider Nscale for computing capacity at data centers located in Texas and West Virginia.
The potential extension, which was first reported by the Financial Times, would have been worth tens of billions of dollars to Nscale. While neither Microsoft nor Nscale have made any official statement to this effect, Reuters cited a person familiar with the matter and also reported that this decision was made several months ago, much before Nscale filed its IPO in September, and that this decision would not impact its existing Texas contract worth over US$ 100 billion.
Meanwhile, CNBC, also citing people familiar with the matter, reported that Microsoft was “shrinking its roster of neocloud partners” to focus on work with a few key suppliers and build out its own data centers. It also pointed to “rising borrowing costs” and “hefty debt loads” in the AI market among other possible reasons.
The decision comes weeks after Microsoft withdrew from a separate agreement to anchor Nscale’s flagship data center project in Loughton, Essex, citing delays in securing electricity connections as readers will recall. Microsoft UK and Ireland CEO Darren Hardman told CNBC in October that the decision was linked to Nscale’s ability to access power, with the delays pushing the expected electricity supply date into the 2030s.
It is noteworthy that Texas, a state that has hitherto been a data center haven, and is a traditionally “red” state, recently flipped to “blue”, electing Gina Hinojosa its first Democratic governor since George W. Bush ousted Ann Richards in 1994. Hinojosa has been a vocal opponent of unchecked development of AI data centers, and has been advocating for greater accountability, sustainability, and legislation to protect ordinary people from the impact of data centers on the availability of power and water for domestic consumption. The governor elect has pledged to halt new projects until lawmakers introduce legislation governing the industry.
The rapid expansion of AI infrastructure has encouraged significant investment in data center developments, often based on expectations of sustained growth in AI demand and future profitability. However, the growing concerns surrounding an AI investment bubble are already creating uncertainty across the data center industry, with some projects being delayed, scaled back or halted altogether.