No, it's actually pretty silly of Microsoft. They're blatantly disregarding YouTube's TOS by allowing users to download videos within the app - I'm just shocked this made it past Microsoft legal.

I believe the conversation would gone like this:

Microsoft Legal: No way! We may get sued and lose!

Microsoft Strategy: Okay, I see, how much will we lose?

Microsoft Legal: Maybe 2 Billion in damages, maybe 5 Billion with a big B in the worst case.

Microsoft Strategy: Okay, Finance Department how much cash do we have?

Microsoft Finance: 75B billion cash in our bank account.

Microsoft Strategy to Dev Division: Okay, make the YouTube app, oh and by the way stick a download button in there too.

Surely the only people who care about this sort of story are savvy enough to realize that both parties are being petty.

Microsoft has nothing to lose in this, every mention of this story in the press helps them. They are probably hoping for a lawsuit

Microsoft has plenty to lose here. Push this too far and they can easily alienate the media partners they need for all sorts of things (like providing content for Windows tablets and Windows Phone).

Lots of posters report that the Youtube mobile site and phone apps don't show ads so I don't know what the fuss is.

Also, if WP allegedly has such low adoption that Google doesnt feel the need to make an app, how much revenue can the WP app hurt?

Vimeo and Yahoo mail have WP apps but Youtube and Gmail don't. Go figure.

Where did I say that ad-free YouTube was pushing this too far? I think both Microsoft and Google have plenty of ways to sort that out.

The download button, on the other hand, is a completely different kettle of fish. If people start using Microsoft's Windows Phone YouTube app to download and distribute YouTube video I think that will have tons of impact, way beyond the existing, lower-profile downloaders, no matter how tiny WP's adoption is.