Visual Studio Code helped Microsoft win developers. New AI coding editors want to own the future

One of the most important products in Microsoft's arsenal is a free, decade-old coding tool. It may not boast the reach and cachet of Windows or Office, but it's a household name in software development and the gold standard that AI coding startups want to displace.

Visual Studio Code was one of the first products released after Microsoft gave up its long-running fight against open-source source software in the early 2010s, and it has grown along with Microsoft's fortunes. The code editor was used by nearly 75% of all developers surveyed by Stack Overflow last year, and 40 million developers worldwide, said Amanda Silver, corporate vice president and head of product for Microsoft's Developer Division, in a recent interview.

VS Code and GitHub are vital pieces of Microsoft's enterprise strategy, which banks on the goodwill developers have for both products to drive business to Azure and its other enterprise software products. But software development practices and preferences are changing rapidly as VS Code approaches its tenth birthday this year.

Little by little, the molasses that characterizes building and changing software is being replaced by lightness and control.

AI coding assistants are some of the fastest-growing enterprise generative AI applications, and two well-funded startups — Anysphere and Codeium — are taking on Microsoft and GitHub Copilot directly by forking VS Code and building their own approach to coding with the help of generative AI models. This week Anysphere, which makes a product called Cursor, announced that it had raised $105 million in new funding, and Codeium has raised a total of $246 million in funding for its Windsurf code editor.

"Little by little, the molasses that characterizes building and changing software is being replaced by lightness and control," Anysphere wrote in a blog post last year announcing an earlier $60 million funding round.

The reach of VS Code — combined with the widespread use of GitHub and Azure, which trails only AWS in infrastructure cloud services — highlights Microsoft's dominant position in this category. Still, investors and tech buyers are watching the evolution of a new generation of coding tools very closely, and so is Microsoft, which announced a reorganization this week that puts the teams that are working on developer tools under a new organization focused on building for "a new AI-first app stack," as CEO Satya Nadella put it.

"Any time when you have a shift, there will be winners who emerge," said Igor Ostrovsky, co-founder of Augment Code, which is also building an AI coding assistant. "There will also be a period of consolidation, and you can have this period where there's a lot of hype and there's a lot of trying to figure out which parts are going to be real and which parts are going to stick."

Track changes

Microsoft announced a preview of Visual Studio Code in April 2015, describing it as a lightweight, cross-platform version of its Visual Studio integrated development environment (IDE). While the terms "code editor" and "IDE" are often used interchangeably, code editors like VS Code are more like souped-up text editors compared to full-blown IDEs, which offer other features like debugging and testing.

"When we first started on the Visual Studio Code mission, we had a lot of customers that were using our Visual Studio products, and the vast majority of those customers were .Net [and] C# customers," Silver said, referring to two (at the time) proprietary Microsoft development technologies from the early 2010s. "If our goal was to allow our Azure cloud to be able to continue to grow and attract more and more developers, it was really important that we pitched a larger tent, and Visual Studio Code was really our effort to do that."

That strategy worked. VS Code grew quickly thanks to its open-source legitimacy, its support for development on Mac and Linux as well as Windows, and compatibility with popular Web 2.0 programming languages like JavaScript and TypeScript.

And developers that didn't want to use a full-blown IDE — which tend to run more slowly given they support a wide variety of features out of the box — found they could customize VS Code pretty much any way they liked with plugins from third-party development tool makers.

"A big part of VS Code has been the support of the open ecosystem," Ostrovsky said. "It's not just for GitHub; you can use Jira, you can use GitLab, and so having this highly pluggable architecture has been really important, and a big part of why VS Code has been successful."

Microsoft controls the development of VS Code, which is technically a Microsoft-licensed version of the Code — OSS project, which is available under the permissive MIT license (and is confusingly labeled as "vscode" on GitHub.) But it does so in an open process with contributions from companies around the world, and the VS Code community has been relatively free of the drama that plagues many other open-source projects that are controlled by a single company.

"It's always a point of intrigue to think about the adversarial relationships between the different major tech companies," Silver said. "In my experience, I think that this has been one of the areas where we've actually collaborated quite well ... we mutually benefited from having great JavaScript development tools."

The AI flow state

But tension is ramping up as developers and the companies that court them realize that LLMs have opened up a whole new world of possibilities for coding tools.

"After spending considerable time observing the evolution of AI in software development, I’ve come to a firm conclusion: the company that will dominate the AI coding agent space won’t be the one that builds the best AI models. Instead, it will be the one that perfects the human interface and effectively manages the middleware between this interface and multiple AI models," wrote Ivan Burazin, co-founder and CEO of Daytona, in a Medium post last September.

That's exactly what Microsoft is trying to do with VS Code and GitHub Copilot, which also works with several different code editors. Last month Microsoft announced that a somewhat-limited version of GitHub Copilot is now available for free to VS Code users, hoping to tighten the gap between its two prominent developer tools.

But Anysphere and Codeium think coding assistants need to move in a different direction. Both companies are building AI coding editors based on forks of the Code — OSS open-source project, which allows them to avoid completely reinventing the wheel by reusing core code-editing components but does allow them to put their own spin on the user interface and experience.

A developer is a creative that actually [needs] a sustained, heightened state of concentration to be able to do the job.

"We started questioning everything about what an editor needed to have and not have if you had this AI flow that could search, traverse, and analyze code as well as make multi-file edits and execute terminal commands," Codeium wrote in a blog post last month describing the evolution of Windsurf. (Codeium and Anysphere did not respond to requests for comment on their plans.)

In a recent interview, Burazin — whose company is building a browser-based IDE that works with several different code editors — expressed doubts about either startup's ability to compete head-on with the Microsoft Azure/GitHub Copilot/VS Code juggernaut.

"They have the whole vertical," he said. "I find the probability that a company that is not a hyperscaler beats them in the next five years [to be] unbelievable," he said, predicting that AWS and Google will make a serious run at acquiring those startups and funneling their customers into their own cloud services.

But a new generation of software developers is entering the workforce, professionals who were in grade school when former Microsoft CEO Steve Ballmer put a disconcerting amount of sweat equity into establishing the company's relationship with developers. They could have very different needs and preferences than the 40 million developers using VS Code, and whoever builds a product that makes their lives easier could shake up the market.

"What actually affects an individual developer's day-to-day happiness is really productivity, almost that flow state that you think about," Silver said. "A developer is a creative that actually [needs] a sustained, heightened state of concentration to be able to do the job."