Google revealed this on Friday that they will build a YouTube app for windows phone 8 that will meet YouTube terms of services. The YouTube app will come later next month.
Here's the joint statement by Google and Microsoft
Microsoft and YouTube are working together to update the new YouTube for Windows Phone app to enable compliance with YouTube's API terms of service, including enabling ads, in the coming weeks. Microsoft will replace the existing YouTube app in Windows Phone Store with the previous version during this time.
What led to the disagreement was that, Microsoft developed a YouTube app for windows phone that allowed users to download videos via the app without running ads. Google got angry since the app does not meet YouTube terms of service, and shot down the app.
