I think we can all take a moderate position and say MS has no right to break Google's Terms of Service. In fact unless I am mistaken under CFAA breaking Terms of Service could be a felony.
Besides MS has much greater recourse than violating the Terms of Service, to the point of circumventing YouTube's ad revenue. If you take MS at their word, it appears they believe Google is engaging in anti-competitive practices, and if they truly believed that then their remedy is in Court not by unilaterally developing a YouTube App in bad-faith.
Notwithstanding G+, it is sometimes over looked that Google already had one of the most successful social networks in YouTube. Separately, it is often over looked that MS also has one of the most successful social networks in Xbox Live.
Google PR on the other hand, is extremely good, they have lots of people believing they're all about "do no evil" and "open" while laughing all the way to the bank.
1) Build app that clearly violates spirit and word of TOS, steals content, blocks ads.
2) Complain and act surprised like Google is being a bad guy when told to take it down.
3) ???
4) Profit!
Now they just need to some how spin in some automatic #droidfail hash tags to all the videos they show in the app and it'll be perfect!
Idiots.
(No, not the developers. I feel an immense sympathy for the people who had to work on this; their managers are the ones who are idiots)