DeepSeek Is 'Forcing' Microsoft to Rethink Its Data Center Spending

In late January this year, the emergence of the R1 open-source AI model from Chinese startup DeepSeek seems to have had a lingering impact on U.S. tech giants.

Last Friday, a rumor suddenly spread in the U.S. stock market: Microsoft had canceled several lease agreements with multiple private data center operators. On that day, Microsoft's stock price fell by 1.9%.

This has led to renewed speculation that, following DeepSeek's low-cost AI model shaking the market, U.S. tech giants might be considering cost reductions.

However, Microsoft itself does not acknowledge this speculation, responding publicly that the cancellation of some data center leases is merely a strategic adjustment in certain regions.

Is Microsoft Starting to Cut Costs?

Recently, a channel survey report released by U.S. brokerage TD Cowen has attracted market attention.

The report, based on information from supply chains and third parties, claims that Microsoft has canceled several lease agreements with at least two private data center operators, involving a total power capacity of hundreds of megawatts. Additionally, Microsoft has paused the conversion of negotiated and signed Statements of Qualification (SOQ) into lease agreements and has reallocated a significant portion of its international expenditures to the United States.

TD Cowen analysts Michael Elias, Cooper Belanger, and Gregory Williams wrote: "While we have yet to get the level of color via our channel checks that we would like into why this is occurring, our initial reaction is that this is tied to Microsoft potentially being in an oversupply position."

The analysts also noted that their channel survey found signs that Microsoft is gradually stepping back from data center construction and acquisitions—they learned that Microsoft has let large site letters of intent exceeding one gigawatt expire and has abandoned 'multiple' agreements, each involving about 100 megawatts.

The analysts claims that Microsoft has also reallocated a significant portion of its originally planned international expenditures to the U.S., which "suggests to us a material slowdown in international leasing."

TD Cowen wrote that the above measures are similar to the strategies previously adopted by Microsoft's competitors like Meta when they decided to cut capital expenditures. This move may reflect that Microsoft is also beginning to self-assess whether its established computing power supply exceeds long-term demand.

Has DeepSeek Made Microsoft Change Its Mind?

For a long time, there have been concerns about the massive expenditures of tech giants on artificial intelligence. Since DeepSeek released its open-source AI model R1 last month, Wall Street's skepticism about the tech giants' burning money plans has grown louder. However, Microsoft has consistently stated publicly that it will stick to its large-scale spending plan.

At the end of January, during an earnings call, Microsoft insisted that it expects to invest $80 billion in AI data centers this fiscal year. Microsoft CEO Satya Nadella stated at the time that Microsoft must maintain its expenditures to meet "exponentially more demand."

Now, with signs of reduced spending on data centers by Microsoft, many are beginning to speculate: Has DeepSeek quietly made Microsoft change its mind?

However, Microsoft still seems unwilling to publicly acknowledge any change in its stance. On Monday, in a response statement, Microsoft reiterated its fiscal year spending target but declined to comment on TD Cowen's report.

A Microsoft spokesperson stated: "While we may strategically pace or adjust our infrastructure in some areas, we will continue to grow strongly in all regions. Our plans to spend over $80B on infrastructure this FY remains on track as we continue to grow at a record pace to meet customer demand."