OK, I guess I'll be the first to chime in. First, I had to watch the video twice to get a full understanding of what your proposal was in full. It's definitely innovative, and different, but there are a couple of problems I see.
1)This will created confusion. You, yourself seemed confused on how to proceed with round 2.
2) Round 2 will be hard to set up. You'd probably would have to have a whole bunch of lap tops to do these MAME save states.
3) Round 1 seems a tad bit unfair. Donkey Kong can be an unfair game, and it's especially unfair when it's just one man. Someone like Jason Wade could get a barrel to the face on the third level, and bang he's done. A person who just knows how to run the boards with top hammer would have too much of a chance to win. It really does become random when it's just one man.
4) Your 4 quarters idea sort of ruins the keeping it short reason for the idea in the first place. Some players will be playing over 6 to 8 hours on four quarters.
If people want to do this, I propose a test run. Have this done on the wildcard machines. Keep the main competition, but have a mini wildcard competition. If people love it, and it's a hit, than maybe have it as part of the main event for the next Kong Off.