I would argue that it is a fair #1 for a few reasons. First, the puzzles in that game are ludicrously difficult though probably not the most difficult ever. Second, much like KQ2 they put the murderously difficult section right at the front which is an asinine thing to do since it means some players will blow $50 on a title and get virtually no game from it. Third, and most importantly it was the last adventure game Sierra ever produced and that single puzzle has tarnished the reputation of adventure games to this day. That kind of crap along with the absurdly difficult Myst clones killed adventure games for a long time.
I've finally watched the video and it really is deeply flawed. Among other things, Mainac Mansion is winnable with any combination of kids. He's clearly too much of a Sierra fanboy to be objective.
But coming back to GK3, not only does he quote the Old Man Murray review I've mentioned two posts back pretty much verbatim (there goes original research; without the review, I'm sure no one would even remember the puzzle), it still stands that this is not a hard puzzle at all. It makes very little sense, sure, but arriving at the solution one step at a time is really easy (using the black marker on the passport is a very obvious thing to do; and since Gabe draws a moustache on it, well, I suppose we'll be making a false moustache, won't we?). And I absolutely can't agree that GK3 killed the genre - the chronology there is all wrong. It came out at a time when it was pretty much dead and buried already. Myst clones certainly played their part, but most importantly, that time was the rise of the Impatient Gamer. And there was nothing the genre, by definition rather slowly moving, could do against that.
I think it's well established now that the sudden death of adventure games can be pinpointed quite exactly: Grim Fandango is released and doesn't sell even remotely as well as expected, year 1998. The genre fell down with a heavy crash at that moment; it just took a while for the dust to settle. Which includes GK3, already in development at that time.