The clearest way to understand it is that VS Code is open core software.

There's actually a lot in that core, especially when you compare it to other open core products (ex. Gitlab). Enough that you can fork it and have a viable MVP for your own IDE (as Cursor, Gitpod, and many others have done)

But you shouldn't ever be under the impression that you fork will be identical to VS Code.

Frankly I think developers have benefited a lot from this. There's actually a strong foundation for others to innovate on their own IDEs without sinking years into basic R&D, and it's much better than the alternative era when ~all the user-friendly IDEs were proprietary.