Although I appreciate Microsoft's effort in delivering a quality YouTube experience for WP8 users, I can't think of a good reason to ignore Google's demand. It seems unfair for Google to deny Microsoft full access to the YouTube API but it's also unfair for Microsoft to circumvent the ad revenue system in YouTube. In the end, it belongs to Google and they can do whatever they want with their product and branding.
I hope both companies come to an agreement that will give us the current app in a slightly different form or an official app from Google.
You can download videos with the Windows app?
And didnt MS recently sent out letters to devs on Windows that used Facebooks trademarks...