So what have you done?
Did you open the air intake up fully?
Did you remove tube B (output tube)?
If you put your finger over the air hole in the top of the intake, do you feel suction? (that should REALLY pull the water up into the cup). Try blowing into that hole to see if it pushes the bubble level down.
Seriously, there are really only 3 things that will do this.
Lack of air going in
Too much back pressure on the exit
Too deep of water
And by the pic, I can see that the first 2 are very clearly problematic. The water depth should be fine...