Microsoft vs. Cursor & Windsurf: VS Code Extension Restrictions Shake AI IDE Market

Microsoft has recently begun enforcing usage restrictions on its Visual Studio Code extensions, directly impacting popular AI-enhanced code editors Cursor and Windsurf, which are built on VS Code’s open-source foundation. This enforcement marks a significant shift in the IDE landscape and has sparked debates about open-source ethics, platform control, and competitive strategy in developer tools. Many users of these alternative editors are now encountering error messages and functionality limitations when attempting to use Microsoft’s popular extensions, particularly for languages like C/C++.

The Rising Competition in AI-Enhanced Code Editors

Visual Studio Code (VS Code) has dominated the code editor space for years, becoming the preferred choice for millions of developers worldwide. However, the emergence of AI capabilities in software development has created opportunities for innovation, leading to the rise of specialized editors like Cursor and Windsurf. These editors, while built on VS Code’s open-source core, offer enhanced AI features that many developers have found compelling enough to switch from the original Microsoft product.

Cursor, backed by significant venture capital and reaching unicorn status, has gained substantial popularity for its AI-powered features. Similarly, Windsurf, created by Codeium, has attracted developers seeking AI assistance beyond what traditional editors offer. Both represent significant competition to Microsoft’s own AI offerings within VS Code, particularly its recently launched Copilot Agent feature.

The Marketplace Wars: Microsoft VS Marketplace vs. OpenVSX

At the heart of this conflict lies the extension marketplace ecosystem. Extensions dramatically enhance IDE functionality, and access to a rich extension library is crucial for any code editor’s success. Microsoft’s Visual Studio Marketplace has been the primary source for VS Code extensions, hosting thousands of tools that expand the editor’s capabilities.

The key differences between Microsoft’s marketplace and the open alternative, OpenVSX, can be seen in this comparison:

As the table illustrates, Microsoft’s marketplace is not open source and explicitly forbids API access for forks in its Terms of Service. Microsoft controls the listing of extensions, and they’re officially designed only for Microsoft’s VS Code. In contrast, OpenVSX, managed by the Eclipse Foundation, is open source, allows API access for forks, and supports community/self-published extensions that can be used across various editors like VSCodium, Gitpod, Theia, and others.

The OpenVSX Registry was specifically created to address the limitations of Microsoft’s marketplace, offering “free access to extensions that can be used with any technology or tool that supports them,” rather than confining developers to Microsoft products.

Timeline of Tensions and Enforcement

The situation has evolved over several months, culminating in the recent enforcement actions:

Late 2023/Early 2024: Cursor created its own marketplace, initially believed to be a wrapper around Microsoft’s official marketplace after previously using OpenVSX.
November 2024: Reports surfaced that some extensions weren’t showing up in Cursor’s marketplace, suggesting Microsoft may have begun limiting access. Around this time, Cursor published guides on “How to install any VS Code extension in cursor”.
February 2025: The download button for some extensions was reportedly removed from Microsoft’s marketplace when accessed outside official Microsoft products.
March 2025: Microsoft faced criticism for removing popular themes with millions of users from the marketplace over security concerns, later reinstating them with an apology after determining they weren’t actually malicious.
Early April 2025: Microsoft released “Agent Mode plus MCPs for VS Code,” enhancing its own AI capabilities.
April 2025: Users of Cursor and Windsurf began reporting error messages when attempting to use Microsoft extensions, particularly the C/C++ extension, with messages explicitly stating these extensions could only be used with Microsoft products.

Microsoft’s Strategic Enforcement

Microsoft’s actions appear to be enforcement of existing terms rather than new restrictions. Their marketplace terms have long stated that it may only be used with “in-scope products and services,” specifically Visual Studio, VS Code, GitHub Codespaces, Azure DevOps, and Azure DevOps Server.

However, the timing of this enforcement coincides with Microsoft’s own push into AI-enhanced coding capabilities, leading many to question whether this is purely a contractual matter or a strategic competitive move. The C/C++ extension specifically displays a message stating it “may be used only with Microsoft Visual Studio, Visual Studio for Mac, Visual Studio Code, Azure DevOps, Team Foundation Server, and successor Microsoft products and services”.

This enforcement creates significant friction for non-Microsoft editors. While users can still install the extensions, they find key functionality disabled or encounter repeated warning messages that disrupt their workflow.

Impact on Developers and Alternative Editors

For developers using Cursor or Windsurf, the impact has been immediate and disruptive. Extensions that previously worked have suddenly stopped functioning or display constant error messages. This creates a challenging situation where developers must either:

Switch back to official VS Code
Find alternative extensions on OpenVSX (which often have fewer features or updates)
Manually install and potentially maintain extensions themselves
Accept limited functionality in certain language ecosystems

Maximilian Schwarzmueller, a prominent programming instructor, noted: “It also means that extensions that worked in the past will suddenly stop working for some Cursor users. And, maybe even more importantly, it clearly shows that Microsoft & VS Code will not sit back and watch Cursor & Windsurf eat their lunch”.

Industry Reactions and Perspectives

The developer community has had mixed reactions to Microsoft’s move. Some see it as anti-competitive behavior, while others view it as legitimate protection of Microsoft’s intellectual property and enforcement of longstanding terms.

Dion Almaer, who previously worked on AI developer tools, commented on the situation:

Almaer notes that “OpenVSX isn’t a full solution due to holding back other core extensions” and suggests that “a better way and a healthy compromise” is needed.

Sam Denty, another voice in the developer community, offered perspective on the role of open source in VS Code’s success:

Denty argues that “VSCode wouldn’t have got to the market share it has if it wasn’t OSS” and suggests that “90% of the extensions on the VSCode marketplace are open-source software.” He further notes that when “VSCode was the best implementation no one noticed their legal terms”.

Some analysts have pointed out that this situation reflects a broader dynamic in the tech industry, where open source components become the foundation for commercial products that later face friction from the original creators. As one commentator put it, “This is a classic example of platform power in action”.

Future Implications for the IDE Ecosystem

This situation has several potential implications for the future of the IDE ecosystem:

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Strengthening of OpenVSX: The restrictions may drive more developers and extension authors to publish on OpenVSX, potentially strengthening this alternative marketplace.
Fragmentation: The developer tool ecosystem could become more fragmented, with different extensions available on different marketplaces.
Fork Innovation: Cursor, Windsurf, and other forks may need to innovate more in their own right, potentially forking critical extensions or developing alternatives.
Legal and Ethical Questions: The situation raises questions about the boundaries between open source and commercial interests, particularly when open source components are used as competitive advantages.

Some industry observers suggest this battle may ultimately be overshadowed by larger shifts in software development. As one analysis put it: “The real question is not which IDE wins 2025, but how coding itself will look by 2030 when AI may be writing most of our code”.

Conclusion: The Evolving Battle for Developer Mindshare

Microsoft’s enforcement of marketplace restrictions represents a significant moment in the evolving landscape of development tools. While technically within their rights according to their terms of service, the timing and targeting suggest strategic competitive motives behind the enforcement.

For now, alternatives like Cursor and Windsurf must adapt by embracing OpenVSX more fully, developing their own extension ecosystems, or finding other ways to provide value despite Microsoft’s restrictions. Developers may need to make choices about which platforms and tools best serve their needs, weighing factors like AI capabilities, extension availability, and open source principles.

The situation highlights the complex relationship between open source and commercial interests in developer tools, where openness enables innovation but commercial control points can still create leverage for platform owners. As AI continues to transform software development, these tensions are likely to increase rather than diminish.