Disclaimer: I used to work for Google, although not on YouTube. This post reflects only my personal opinions.
So many crocodile tears from Microsoft, and a shallow, silly writeup from Peter Bright, who is reliably pro-Microsoft but lately has been treading perilously close to shill territory.
Please, imagine how Microsoft would behave (indeed, has behaved in the past) were the shoe on the other foot. Imagine that any Microsoft competitor implemented an app for their platform which allowed Zune or Xbox content to be streamed in full fidelity outside of Microsoft's control.
Bright's analysis of the current behavior of the YouTube mobile site is neither here nor there. An app operating outside Google's control cannot be responsive to future changes Google makes to the YouTube user experience. Perhaps Bright has never heard of building a compelling product first, and profitably monetizing it later — also known as the business strategy of every successful consumer Internet service?
Now, leaving aside what Microsoft would do, or what makes business sense for Google, what policy is in keeping with the spirit of the Internet? The Internet is an internetwork — a network of networks — and historically it has been considered impolite to direct significant load to other people's networks without some form of reciprocal exchange, whether that's money, peering, or some other resource. Streaming videos off someone's service in your app is like hotlinking images off someone's web server in your web page, only a thousand times more bandwidth-intensive. (Since streaming video is more complex than HTTP-over-TCP, it's also greedier with non-bandwidth computational resources too.) Google gives away so much stuff gratis that now people apparently expect them to give away everything forever. But unilaterally giving away everything forever has never been a sustainable basis for internetworking.
Microsoft knows this perfectly well; as a smart man once said in a different context: "Who can afford to do professional work for nothing?"