I think single Main Reason why Google requires 3rd parties to use an iframe is that it keeps them in control of when and how ads are shown, what can be rewinded, etc.
Without updating the 3rd party app and republishing it to all stores.
They loosen this requirement for google's own youtube clients because they can push new version of those apps whenever they like.
They had no guarantee that MSFT would respond to their requests for changes in a timely manner in the future.
Why didn't MSFT want to use an iframe?
Because arrogant ignorance of the open standard of HTML5 is part of company DNA.
Any web developer can rant for hours how crappy IE6-9 are and what a drag it is to maintain compatibility with IE when you are building a modern webapp.
To remind everyone that IE11 will be dead on arrival, I'm copying some html5test results:
Chrome - 463
Firefox - 410
Safari - 378
IE 11 - 355
But if MSFT bothered to properly implement HTML5 then
a) they wouldn't have difficulty building a youtube app in accordance to the google's terms and conditions
b) WP users would enjoy better browsing experience
c) developers wouldn't have to deal with the compatibility mess caused primarily by IE6-10 and not yet released IE11
Everyone would win.
