It always felt to me more like a desperate attempt by Microsoft to regain the IDE market share as low end FOSS editors started taking over. So MS wanted to appeal to the open source community.
And it worked. Even if the primary build of VSCode which most people run isn’t technically open source.
The FOSS text editor space was always crowded between vim and emacs. FOSS alternatives would get measured against these 2 behemoths and it was a tall order to compete against. Now FOSS IDEs were a different story.
Java, C#, and C++ had many sophisticated and advanced IDEs, some FOSS some not. However, PHP, Python, Ruby, and JavaScript were quickly gaining huge mindshare and those developers didn’t want to install Visual Studio, Eclipse, NetBeans, or IntelliJ. It’s a tough proposition to tell a Ruby dev to install Java, then install Eclipse, then install an extension, then learn Eclipse nonesense just to edit your Ruby files vs “just open SublimeText and edit your files”. Most of what those developers wanted was just syntax highlighting and basic directory navigation to begin with. Atom/vscode were an attempt at SublimeText alternative. VScode was objectively better than Atom and TypeScript was also objectively better than CoffeeScript.
The FOSS languages were taking over and there was less reliance on the traditional IDEs that MS (amongst others) were building.
MS wanted to appear more FOSS friendly so released VSCode.
Sorry for the misunderstanding that caused. Though the upside was it did lead to your excellent comment adding the detail it did.