They can build a better product with their resources effectively extinguishing Cursor, who will then need to find a way to differentiate.

If Cursor was smart, they would have decoupled from the beginning as they had first mover advantage. They will now have to adapt while fending off competition from MSFT and the other players.

MSFT meanwhile, have discovered that this market is too profitable to be left untouched. They have probably been building their agent for a while and have now decided to launch while simultaneously blocking direct competition. They already have an ecosystem with users who have switching inertia. It's a brilliant yet ruthless move.