Wrong it doesn't block ads.
The original app did. That's when Google stepped in and dropped the hammer. They gave MS a list of things to do. Even from reading the article, the chap says that they haven't done all of these. Google wanted the app in HTML5 - the app isn't. They wanted other features implemented (which aren't for whatever reason, blame MS or Google - it sort of doesn't matter - they are not implemented) so Google has pulled the plug.
While I am not totally convinced that at least part of this isn't Google playing tough and messing with MS, it doesn't sound like MS has a huge platform to stand on. Do what google asks so that Google will serve you THEIR content.
There was one sticking point in the collaboration. Google asked us to transition our app to a new coding language – HTML5. This was an odd request since neither YouTube’s iPhone app nor its Android app are built on HTML5. Nevertheless, we dedicated significant engineering resources to examine the possibility. At the end of the day, experts from both companies recognized that building a YouTube app based on HTML5 would be technically difficult and time consuming, which is why we assume YouTube has not yet made the conversion for its iPhone and Android apps.
I am personally not a fan of "Do as I say, not as I do..." but when you are giving your market competitor access to your content like this, it doesn't seem a totally unreasonable request, does it?