I'm sympathetic to complaints about overly technical interviews (I've bombed a few in my day because of stress and/or ignorance), but as others have pointed out, this is FizzBuzz. I'm generally very bad at interview/algorithm puzzles, but I could even figure this one out pretty quickly.
The big difference between the two metaphors is that mine has direct impact on your personal life and negative consequences are gonna be seen as your fault, while yours is a company threat - fixing it will get you seen as a hero, not a disgraced villain.
Unless they "cheat" this should give you a good idea of what they're capable of. The cheating should also show up if they cannot explain it or why they wrote it the way they did.
Additionally, they could spend some time with the team they'd be working in, pairing (or whatever) with other members and really demonstrating their abilities.
It's not really that difficult to get away from the whole "technical question at the interview" problem, and I'd wager that in the long-term it'd be better for all concerned.
Even Google lets you try again in a year.