Have a read of their actual results and maybe re-think your hypothesis a bit. Microsoft’s revenue went up by 18%. I think they’ll be fine without some .NET extension,
But this extension, by its very nature, is for the VS Code. So, in this case, VS Code isn't being neutered to make a paid product more appealing. The only thing I can think of is that they want to keep the "secret sauce" away from JetBrains to give Visual Studio an advantage over Rider. Its really perplexing when you consider that they created LSP and DAP. And C# was one of the first languages to have an implementation for both standards which opened up the door to potential C# feature parity between Visual Studio and non-Visual Studio editors.
I just don't understand why anyone working on .NET tooling would think that this decision would go over better than the hot reloading one. Once you open the FOSS genie, you cannot put it back in the bottle without stirring controversy. Is protecting some small percentage of VS license revenue worth all of this bad PR they seem to be willing to subject themselves too?