MS response is awesome.
I understand that businesses are businesses, and "free to use" sites need ad's in lieu of subscription fees (which is the next step for YouTube).
But the problem with ads on Youtube as they exist right now is that if I want to watch a dumb 30-second fart joke video that some random schmo posted, I have to watch an ad. Ad-showing isn't quality or popularity-based, and that kills the user experience. If I have to watch a 15 second ad for a 15 second video clip, you can bet I'm going to hit the "back" button pretty fast...
But honestly, how much does this really matter in the first place given Windows Phone small marketshare... I'd have a pretty good laugh if Google made a news statement that they are able to pursue MS for this, but chose not to since the marketshare wouldn't recoup their lawyer fees.