> The disastrous outcome isn't a penalty--it's a critical mass of users switching to Copilot because they can't use their Microsoft extensions in Cursor any more.

What will happen in this situation depends a lot on the "reputation" of Microsoft vs Anysphere (Cursor) and their "marketing":

If Anysphere's "marketing" wins, they mass of users will be very disgusted by Microsoft's moves that they will avoid it like the plague to touch basically any avoidable product of Microsoft (including in particular Github Copilot) again.