Machinima
Machinima is a term used to refer mainly to videos with a purpose made in video games. There is a firm distinction between a machinima and an ordinary video of gameplay, normally being that machinima is associated with acting, and game characters talking to each other rather than fighting. One of the most well-known examples of a machinima is Red vs Blue, a series created in Halo 2 (originally in Halo 1), and distributed freely on the internet.
Machinima has used to be widely popular form of video, and many games are used to create it, including 
Half-Life 2 and 
Garry's Mod. (See more in Machinima in Source. Many examples of machinima videos can be found at websites such as Machinima.com (defunct, no longer available).
Legal issues
Technically, the materials and models used in creating machinima videos belong to the game's creator, so they cannot be published with a price tag, and it is debatable whether most machinima violates copyright laws. Red vs Blue, for instance, was contacted by Bungie, the developers of Halo, in their early years, but thankfully Bungie was willing to work with them to divide profits. Red vs Blue has now extended its presence to Xbox Live, and is known worldwide.
Valve's point of view
Well, that about says it all. Valve has no interest in machinima. It is really unfortunate because the Source Engine is so amazing and they offer such great tools for creating machinima.
What does this mean for Source Engine machinima? Probably nothing. Most people will continue to do what they do until they are told directly not to do it. But this does change things for those of us who look beyond YouTube popularity as what we want to achieve. Source Engine can make amazing machinima. However, you cannot do much with it other than put it on YouTube, hope for a lot of views and then maybe hope that those views lead to somebody taking interest in you. And what if they do take interest in you, then what? You can't actually use the Source Engine to make anything for anybody to use. Even joining some festivals will prove risky because some ask for extensive copyright permissions. This means YouTube Partner and Revenue Sharing is out of the question as well. I still have no idea how machinima.com does it and Valve would not comment on the subject.
I don't want to give the wrong idea and make it sound like we are giving up Source Engine machinima after our first try or anything. We still love the engine and the machinima that comes out of it and of course still have Shelf Life chapters to work on, we just feel very disappointed in Valve and the lack of interest they have in machinima. There is clearly no real future with Valve or Source Engine machinima other than personal projects free to the community.
This may lead to people moving away from Source Engine machinima and toward alternatives with licensing options. We were just given the iClone software that looked great already but sounds even better now that we know where Valve stands on machinima. Who knows what else we will look into, Source Engine is all we have known up until now.
Well, that's the news from the Valve vs. Machinima front. Thought it might be interesting to some of you.