Now THAT'S what you call an update!
Update! New mode. It looks like Metaknight is a bad guy.
I think this mode is basically Mario and Kirby (or whoever) are supposed to be fighting for the crowd and Meta Knight. But when they decide to team up and stop the fighting, Meta Knights comes to punish them for not obeying the rules of This World...
That's one hell of an update! The best yet I would say.
I have a different theory...
It looks like the rules are, two people fight and whichever loses is turned into a trophy, but remember in Melee that even when you WON you were turned into a trophy so that would explain why Mario is a trophy as well. Now after Mario and Kirby fight, Kirby is turned back into a trophy and Mario decides "You know what? I don't want my buddy to die." so he brings him back to life. Someone in the sky then says "AWW HELL NAW! THEY BROKE THE RULES!" and comes to wreak havok. People behind this mess? So far I can only say Metaknight and Bowser, but there are possibilities of others who wanna make Mario pay.
Why do I say Metaknight? The ship of course.
Why do I say Bowser? Well is it just me or does anyone see his silohuette in the clouds?
edit
Also, when you save it, the picture is named "modea01" mode a 01? Sounds like they'll be expanding on this a little more than this update.
edit #2
EXPANDED LAUGHING SKULL THEORY
We know from the original and the second that it is the same person in control. The teenager, adult, we will call him/her the "gamer".
The gamer is the end boss in every game. He/she is the master hand. The hand brought in the characters, and it can take them out.
As told in the new update, we see that there are rules. The rules are simple, and that is that you either fight or you die. Fighting is all that is allowed and when you lose you turn into a trophey (isnt that what happens when you win as well [as proved in SSBM]?).
In this light, it would seem that its possible that Mario and Kirby (maybe others) no longer wish to be tropheys and choose not to fight at all (thereby remaining "alive"). As we see in the video style screenshots, Kirby is obviously turned into a trophey but Mario somehow turns him back into the "living".
Whoever runs things is not happy at all. Not at ALL.
So who could it be that seeks to fix things? Whoever it is is using Metaknight's ship as a transport. So who could it be? My guess is that Master Hand is finally a playable style character. Another guess could be that this little guy we see here, the unknown, is some kind of controller or puppet.
ummm...sweet? seems cool as far as I have no clue what the hell is going on... yeah
I have a different theory...
It looks like the rules are, two people fight and whichever loses is turned into a trophy, but remember in Melee that even when you WON you were turned into a trophy so that would explain why Mario is a trophy as well. Now after Mario and Kirby fight, Kirby is turned back into a trophy and Mario decides "You know what? I don't want my buddy to die." so he brings him back to life. Someone in the sky then says "AWW HELL NAW! THEY BROKE THE RULES!" and comes to wreak havok. People behind this mess? So far I can only say Metaknight and Bowser, but there are possibilities of others who wanna make Mario pay.
Why do I say Metaknight? The ship of course.
Why do I say Bowser? Well is it just me or does anyone see his silohuette in the clouds?
edit
Also, when you save it, the picture is named "modea01" mode a 01? Sounds like they'll be expanding on this a little more than this update.
You kinda said everything I did, except for the fact that Bowser was an enemy. And I do see Bowser in the clouds! As well as someone I don't recognize on the far right and then what looks like Ganondorf on the far left.
Oh... you edited your post. Well, I'll go even more in-depth! >:3
Hmm very interesting. And ya, my perception of what was happening was similar to Ricky's.
Although I wonder if that last figure
is Mario. It kinda reminds me of the sandbag in home run contest for some reason.
What if that sandbag was a sort of cage for Mario... maybe it locks him up from being a playable character, and you have to go about unlocking him again...?
That's way too much unprovoked theorizing, but it would be interesting, and keep players endlessly busy.
More realisticly, it's probably the story mode we've been hoping for.
Which is very cool.
=(
Just bustin yer Norris-lovin chops, man!
...and you see, I'm back here speculating again, aren't I?
I'm just as ridiculous.
very interesting theories. i agree with Ricky's thoughts as well. finally nice to see the Smash Bros. could be getting a central villian. also so excited the Smash Bros. is finally getting a "story mode" i wonder what will happen to the other modes.
Alot of crazy theories

I like Ricky's first idea, I have to look at those clouds again.
Now THAT'S what you call an update!
Update! New mode. It looks like Metaknight is a bad guy.
very interesting theories. i agree with Ricky's thoughts as well. finally nice to see the Smash Bros. could be getting a central villian. also so excited the Smash Bros. is finally getting a "story mode" i wonder what will happen to the other modes.
Most of them will probably stay in the game.
Edit....
It looks like there is a girl on the left in the Clouds
I agree with Ricky. Who is that guy in the last picture with the purple smoke though?
Woah, Cut Scene's in a Smash Story mode? Ballin. Just Ballin.
I'm not sure, I've never seen him before. He must be someone bad.
Its weird that Mario and Kirby, like OMFG, Shook hands. Liek.
I can see one of those virus enemies(i think they're from Dr. Mario) in the part of the cloud right above the space ship. Maybe one of those things will be in the game?
edit: now i think i can see ridley at the far right. If that really is him then this game just got even more fun
Really it looks like a face to me, but I can't tell who it is.
wth? Who are you people seeing this?
WTF?!
Is Sakurai trying to give Smash a story?! Why the heck even bother. Just give us multiplayer, I'm not getting Smash for single player.
I mean sure it looks cool, but wow. Doesn't seem necessary.