They technically don’t distribute any code. They show it to you in a hosted environment. It’s the user that causes a distribution. They “provide it as part of the service.”
I'm not sure how sending it over the wire to Visual Studio doesn't count as distribution. Distribution without attribution, reference to where it came from, how it's licensed, etc.
Conceptually it's not particularly any different from distributing it to your web browser. They basically just turned Visual Studio into a fancy Github browser that has some editing features.
OSS license obligations mostly kick in upon distribution, hence this is a pivotal concept in this context. It’s also important because of the language in the TOS that says the code won’t be used outside the service. The stuff related to streaming is kind of unrelated here because movies aren’t under copyleft licenses and so the question of whether or not there was distribution there is not relevant- the question is whether or not the copyright holder’s monopoly right were violated and those include the right of public performance, public display, as well as distribution. They would have violated other copyright rights even without a finding of distribution.