Assuming they figured out how to display ads without using the embedded HTML5 player, a guess I can offer (as a WP user) as to why they don't is that if they do, the video would launch in the default webview video player, which is honestly pretty terrible. You can't even scrub through videos. The MS-built YouTube application however had a much-more featured video player[1].

Quite a few WP applications that are video-centric (such as the non-MS YouTube apps, Netflix, etc.) use their own much-improved video player. Even Microsoft provides a better video player for usage in WP/W8 applications[2]. Making an improved video player on a per-app basis probably would require a lot less overhead than changing the system-wide video player.

This is all just a guess of course.

[1] http://www.windowsphone.com/en-gb/store/app/youtube/dcbb1ac6..., check the screenshots

[2] http://playerframework.codeplex.com/

My gut tells me that everything falls down to your last bullet, i.e. Google does not care if the full app is HTML5, but they want the an HTML5 YouTube player with appropriate DRM to be embedded in the app so they have full control on the ads and other stuff they are serving, and Microsoft is deliberately trying to avoid it and misleads everyone into thinking that they require full HTML5 app to be implemented.

You know what? If it is time consuming to implement, it's Microsoft's problem, not anyone else's. Lots of people would be happy to get shitload of money from Microsoft and assemble a team to implement it if their problem is difficulty and they are so generous to be willing to pay cash, as they brag about in their blogpost ("...at Microsoft's expense...").