Brian Fry

Why Could Microsoft Request Changes, and Why Could IREN Accommodate Them? There were five factors driving IREN's recent share price collapse: SemiAnalysis's malicious attacks, the delay to Horizon 2–4, the industry-wide business model concerns triggered by CoreWeave, rising interest rates driven by inflation, and the prospect of Democrats coming to power and imposing regulatory requirements on the data center industry. Among these, the delay to Horizon 2–4 was one of the most significant drivers. Otherwise, the share price probably would not have fallen below $30. Following the earnings call, this issue has finally been explained. It was not a failure of IREN's execution. It was a matter of Microsoft—or, more accurately, it was not really Microsoft's fault either. The problem was that everyone had underestimated the pace of technological advancement. Technology is evolving so rapidly that even a giant like Microsoft can encounter all kinds of challenges. The two parties resolved the issue amicably. There was clearly no delay penalty involved, and the company has not explained to the market who will bear the additional costs associated with the design modifications. Should our interpretation of this matter end here? I don't think so. Far from it. The capital market focuses on delivery timelines and the ARR they generate, using these as straightforward measures of a team's execution capabilities. That's simple enough. But what actually happened here carries much deeper implications. There are several important aspects worth examining: Point 1. This is a process of mutual adaptation between two parties as a high-end facility takes shape. IREN is the outright owner of the data center assets and retains control over the design authority. Microsoft is simply leasing the facility for five years, after which ownership reverts to IREN, which can then operate it independently. Therefore, IREN's initial design incorporated provisions for the highest-end GPU chips available at the time. I recall that IREN originally proposed a minimum rack power density of 200 kW, but subsequently lowered the minimum to 130 kW at Microsoft's request. The final design ceiling for the Horizon series, however, still reaches 200 kW. The advantage of this arrangement is that Microsoft does not have to pay a premium for power density it does not need, while IREN provides its customer with the best possible economics and retains the flexibility to scale up in the future. Microsoft's relatively conservative choice was likely due to its lack of real-world operational experience and data with high-density liquid cooling. A lower minimum rack density gave it room to ramp up and fine-tune operations. This was also beneficial to IREN, because Microsoft's operational data was precisely the kind of window into real-world performance that IREN wanted to observe. The market today has a very superficial understanding of this. It has completely failed to recognize that the Horizon series is, in fact, one of the very few highly advanced liquid-cooled data center facilities operating at a 200 MW scale. There are numerous firsts involved. Even Microsoft, despite being a hyperscaler, needs some room for error when dealing with so many first-of-their-kind technologies. Its partnership with IREN provides exactly that flexibility. Point 2. In the AI industry, the ability to achieve compatibility between hardware and software is critically important. Horizon 1 has already been delivered, validated, and entered revenue-generating operations. This demonstrates that it is fully compliant and ready for use. However, after operating for some time, the parties discovered that certain configuration improvements could bring the facility closer to its optimal performance. When Microsoft made this request, IREN could have refused. But the customer would not have been satisfied. IREN's vertically integrated business model gives it the ability to meet such customer requirements. In this context, the delay and the additional costs incurred to make the necessary changes become secondary. What matters most is the ability to satisfy customer needs. The same situation could arise with CoreWeave and Nebius. Meeting Microsoft's requirements would be considerably more difficult for them, because it would depend on the willingness of the parties that actually own the data center assets. Even if the necessary changes could eventually be approved, the response time would unlikely be as fast. Customer requirements of this kind can manifest themselves in many different ways. We have also seen this reflected at every level of the IREN–Perplexity partnership. Hardware and software compatibility is an integral part of their collaboration, with some requests for adjustments to physical infrastructure closely tied to the specific needs of the customer. A vertically integrated compute service provider has the ability to offer customers targeted services that extend all the way down to the physical infrastructure layer. This is a very significant competitive differentiation. Point 3. The implications for IREN's influence and market position are substantial. What the capital market sees in this episode is a delay. What a biased evaluation firm sees is poor execution. But what companies with genuine industry expertise see is that IREN possesses capabilities that others simply do not have. This complex and extensive physical infrastructure foundation can be adapted to meet the individual requirements of different enterprises. That means every million dollars invested here can potentially generate greater value than the same amount invested with competitors. Combined with the various capabilities Mirantis brings at the orchestration layer, the overall value proposition is exceptionally strong. This undoubtedly enhances the company's pricing power. Microsoft, meanwhile, has also seen IREN's capabilities firsthand through this experience, as well as its composure in the face of widespread external criticism and a collapsing share price. IREN has approached this partnership with sincerity and goodwill. For Microsoft, which is currently in urgent need of high-quality compute capacity, there is little doubt that this experience will encourage deeper and stronger cooperation with IREN going forward. Of course, when it comes to service, IREN is more than willing to accommodate its customers. But when it comes to price negotiations, we are unlikely to see again the exceptionally favorable pricing Microsoft received from IREN a year ago.