Ok, I was disappointed at first when I heard the news, but after thinking about it, I believe that good things can come out from this decision.
First off, Final Fantasy VII is a huge, huge game and developing a remake of it would take a very long period of time, considering that they are rebuilding it from the ground up, graphics, full 3D environments, combat, voice acting, side quest and so on. Moreover, they want to change and add some parts to it, so they have to do even more work. Releasing it in a "standard" way could mean waiting years and years and Square might not see the investment worth it along the road.
By releasing it in a episodic way I think Square can truly achieve their (and our) vision of the game, and they can guarantee a high quality release in a relatively short amount of time. Also they can receive important feedback with every episode and they can reinvest the money earned to make the game even better. Of course pricing is the key here and I hope they won't fuck up in this regard.
I know that it sounds a greedy and anti-consumer choice, but I believe that Square is dealing with a lot of pressure right now and, while they care about fans (they wouldn't do this remake otherwise), they also care about their investment, because I bet this is going to cost them a lot of money.
I want to close with a prediction: from what they said about making Midgar much bigger and explorable, I'm pretty sure that the first episode will be only about Midgar, maybe until Kalm Town and Cloud's flashback. I bet that this first episode will come out by this time next year.