The closed-source nature of VSCode is a little more practically important than you make it out to be. It prevents Linux distros from including VSCode in their package managers (except non-free categories, usually disabled by default). And makes it impossible to patch VSCode, only "Code - OSS". Also, for normal users, the brand/icon is everything. If they go to their computer and "the chrome icon is blue", they will want the old icon back, if only because it's the one they know and trust.

You are distorting facts by calling VSCode open source. This [1] is the license for VSCode. It lets you "use any number of copies of the software to develop and test your applications, including deployment within your internal corporate network". The license implicitly (by omission) does not let you distribute binaries to your friends and colleges outside of your "corporate network". This is the defining characteristic of freeware. I am not a lawyer, that was not legal advice.

Your argument is akin to calling google chrome open-source. Yes, it is based on the open source chromium, but Chrome is decidedly not open-source.

On a more practical note, the fact that Microsoft does not distribute an open source build of VSCode is pretty annoying.

[1] - https://code.visualstudio.com/License/

For adopters, i.e. organizations that want to invent something new on top of existing open-source code, there is a huge difference between the VS Code-kind of open-source where the project is still fully controlled by a single vendor and vendor neutral open-source. E.g. Kubernetes wouldn't be where it is if Google hadn't put it into a vendor neutral open-source foundation.

You can tell from the many adopters of Theia, that there is demand for this. You don't see such downstream products based on VS Code, because of the lack of vendor-neutrality and because it was not designed to be customizable (beyond extensions). Finally, the fact that you can develop your IDE once and run it in browsers and as desktop app is important, too. VS Code doesn't do that directly as VSO is private code.