On a long enough timeline Microsoft wins this battle. I don't think you appreciate the inertia of market dominance and a massive existing user base. They can simply copy features and push them to millions of developers overnight. More likely, Cursor either gets acquired or becomes a niche alternative while VSCode maintains its dominance.
Competing with established players when you have zero moat is always tough and I don't think Cursor are even close to winning their category yet. Bureaucracies exist in large companies precisely because they've grown successful enough to need them. While they do create inefficiencies, they also enable consistent execution at massive scale - something startups often underestimate until they try to grow beyond their initial niche. It may be slow, but they win by outlasting, outspending or buying you.
However if you simply mean that Cursor can carve a niche quick enough to become an attractive acquisition target then I might concede that fact.