See =/= play. There are very few people that will sit through a LP then say "Yay, now I don't have to play the game!" (unless the game is extremely linear and unchallenging). This is why displaying the content of a game is fundamentally different to displaying the content of passive media, like movies/songs/books, and why comparisons between the two aren't valid.
From a legal standpoint Nintendo have the right to take their cut of the ad revenue, but from a legal standpoint the Westboro Baptist Church have the right to protest at war veteran funerals. Having the right and exercising the right are two very different things, and people shouldn't forgive or excuse actions simply because they had the "right" to do so. Nintendo are being dicks, and their actions will probably end up losing them money through a combination of less free advertising and less respect from their consumers.
In the case of the first section, seeing isn't playing, but it DOES play a major part in the experience. If you see the whole game all the way through, you've seen all the characters, all the story, all the dungeons, etc. There are many people who don't watch LPs specifically because of stuff like that; it's all spoilers and they'd rather find out for themselves. LPs can serve as a make or break deal. Just because people are being exposed to the existence of the game through LPs doesn't mean they ever intended or are swayed at all to buy the game in the first place, and as a result there is no net effect there except for them gaining the knowledge of (almost) all the contents of the game, which they would have had to have PAID to see. That's the major reason LPs shouldn't be monetized in the first place, because even if it pales in comparison to the price of the game or whatever, that's still money lost by Nintendo that would normally have went towards getting the game in the first place for the person to actually see the whole game for themselves, rather than through an LP. So ultimately, there is no "free advertising," because it's paid for by what would have normally been a part of Nintendo's sales.
They may lose respect from their customers, but that's not going to stop them from buying the games. EA's respect level is probably down on the ground, yet they're still making a ton of money. As long as the games are interesting and entertaining, people WILL buy them regardless of how great the company's reputation is (again EA, Square Enix, Sega). I personally feel like the monetizing LPers got off way too easy; at least you're still able to KEEP your videos. Many other companies like Microsoft and Square Enix would have just taken them down entirely. Nintendo PR obviously decided that'd cause more trouble than it's worth, and decided to take it out a little easier.
EDIT: Let's take it even further. LPers have every right to sue. And they totally could if they wanted to. In the end however, the legal fees would outweigh whatever they earn from monetizing. In addition, they'd likely lose anyway, and probably get LPs banned, which wouldn't necessarily be a bad thing IMO. Nintendo could also sue, but they've probably already figured it isn't worth all the legal fees as well.
Edited by Koh, 23 May 2013 - 07:41 AM.