Microsoft bans free software from Windows Phone Marketplace
The ban, in section 5.e of the terms, forbids any software which is subject to an "Excluded Licence"; it defines that in section 1.l as any licence which requires, as a condition of distribution, that the source code for the application be made available, or allow the creation of derivative works or redistribution at no charge. It specifically names GPLv3 licences and includes the General Public Licence (GPL) version 3, the GNU Affero GPL version 3, and the GNU Lesser GPL version 3 as examples of excluded licences.
The prohibition of free software licences appears to be Microsoft's own response to the issues raised by the appearance and later removal of GPL applications such as VLC from the Apple iPhone App Store. Commercial application stores like Apple's and Microsoft's do not have mechanisms to make source code for applications directly available. They also have some form of DRM lock which prevents the binary being passed on to another user, on all applications, even ones available for no charge in the market. It is these restrictions that make the stores incompatible with licences such as the GPL.
Developers have got around this incompatibility by making software available under a dual licence, GPL and proprietary, in the same way that companies make commercial versions of GPL licensed applications available as "enterprise editions". Dual licensing does, though, require the agreement of all the copyright holders of the source code.