Microsoft’s Strained Partnership with OpenAI Linked to Reversal of Datacenter Expansion Plans
Microsoft Halts Major Data Center Expansion Plans
Overview of Microsoft’s Decision
Recently, Microsoft has chosen to halt its planned expansion of data centers across the United States and Europe. This move, which involves pulling back on a significant 2 gigawatt (GW) increase in capacity, appears linked to a cooling relationship with OpenAI, as highlighted in a note from TD Cowen, an analyst firm.
Details of the Cancelled Plans
According to TD Cowen, Microsoft has not only cancelled but also postponed numerous data center lease agreements this past month. Over a six-month period, the tech giant decided against leasing more than 2GW of additional capacity. This shift reflects Microsoft’s strategic response to the evolving demands and forecast of the data center market.
- Reasons for the Pullback: The analysts note that the decision to scale back was primarily influenced by Microsoft’s choice not to support additional training workloads for OpenAI.
- Market Dynamics: The analyst report suggests that the cancellations indicate an oversupply in data centers compared to the current demand. As a result, Microsoft’s lease deferrals aim to recalibrate its medium-term capacity to align more closely with actual demands.
Reworked Agreement with OpenAI
Notably, Microsoft recently altered the exclusivity conditions in its partnership with OpenAI regarding how it utilizes the Azure public cloud for hosting workloads. A blog post from Microsoft dated January 21, 2025, detailed this change, which included:
- First Right of Refusal: Microsoft now has the first right of refusal (ROFR) concerning the hosting of OpenAI’s workloads. This means that OpenAI can consider other partnerships if Microsoft cannot fulfill its capacity requirements.
- OpenAI’s New Capabilities: The revamped agreement also permits OpenAI to develop its own infrastructure to support its research and model training needs.
OpenAI’s Ambitious Plans
In early 2025, OpenAI at the same time unveiled "The Stargate Project," a grand initiative with a budget of $500 billion to expand its infrastructure over four years. This project includes financial backing from several major partners, namely SoftBank, Oracle, and MGX. Although Microsoft is listed as a technology partner for this project, its absence from direct financial investment raises eyebrows amidst speculation about the shifting dynamics of its relationship with OpenAI.
Analysts’ Perspectives on the Shift
The TD Cowen analysts have pointed out that the announcement of The Stargate Project signifies a potential reallocation of OpenAI’s business between Microsoft and Oracle. There have been indications that OpenAI leadership has expressed concerns over Microsoft’s ability to meet its data center needs quickly.
- Competing Offers: Following Microsoft’s withdrawal from certain lease agreements, competitors like Google and Meta have stepped in to fill the gaps in data center capacity, particularly as both companies are experiencing increased demand.
Conclusion
Microsoft’s recent strategic decisions regarding data centers illustrate significant shifts in its relationship with OpenAI and the broader market dynamics. While the company withdraws from leasing agreements, its competitors are seizing the opportunity to enhance their capacity amid growing demand. The next steps for Microsoft will be closely watched as its partnership with OpenAI continues to evolve.
