They may not be able to do "Embrace, extend, extinguish" in the exact same way with their open-source efforts, but that doesn't mean they would not be able to apply leverage given sufficient market share.
Imagine if VSCode becomes the defacto code editor. Then they add seamless integration with GitHub, including value-added features which are not available from other providers like gitlab. Developers accept it because everyone uses GitHub anyway. Then they add features to GitHub to integrate seamlessly with Azure, and bug tickets related to GitHub plugins for interop with AWS start to take longer and longer to be resolved. Then maybe one day they change the terms of service, and it's no longer allowed to develop GitHub plugins which compete with Azure. Then they release an update to VSCode which uses deep learning for code completion. On Windows it uses a new DX12-powered subsystem which makes it fast and responsive, while on Mac and Linux it falls back to a single-threaded solution which makes the whole application feel laggy.
In a scenario like that, it would be in principal possible to fork VSCode and make a more platorm-agnostic version, but how realistic is it that an individual, or even a small team will be able to keep up with a large corporation which seeks to make such an effort less successful.
Open source software is great, but if Microsoft owns the governance of those projects, and the up-streams and down-streams, they still have a lot of power over them.
Tooling is commodity now. If they don't make tools that run well on other platforms then other vendors step in to fill the demand, or they just wont have the demand in the first place and they lose mindshare anyway.
This is what happened with Java, Go and Javascript growing rapidly while .NET took a long time to get out of legacy/desktop phase, partly because the tooling was fantastic but isolated to their own Windows platform. They've learned their lesson and have realized there are better businesses by providing the compute and making it easy to use with free and plentiful tools.
Your scenario sounds not only plausible but highly likely. Especially the point about individuals or other principle-driven organizations being relatively unable to reproduce the closed-source advantages that they could tie into open source projects to make them significantly more useful on MS-blessed platforms and systems. This is all a very real possibility.
Imagine if VSCode becomes the defacto code editor. Then they add seamless integration with GitHub, including value-added features which are not available from other providers like gitlab. Developers accept it because everyone uses GitHub anyway. Then they add features to GitHub to integrate seamlessly with Azure, and bug tickets related to GitHub plugins for interop with AWS start to take longer and longer to be resolved. Then maybe one day they change the terms of service, and it's no longer allowed to develop GitHub plugins which compete with Azure. Then they release an update to VSCode which uses deep learning for code completion. On Windows it uses a new DX12-powered subsystem which makes it fast and responsive, while on Mac and Linux it falls back to a single-threaded solution which makes the whole application feel laggy.
In a scenario like that, it would be in principal possible to fork VSCode and make a more platorm-agnostic version, but how realistic is it that an individual, or even a small team will be able to keep up with a large corporation which seeks to make such an effort less successful.
Open source software is great, but if Microsoft owns the governance of those projects, and the up-streams and down-streams, they still have a lot of power over them.