I've just replayed FF7 (it was very good) and here's the way it is with the episodic release.
If they're doing a straight remake of the game, in story terms it only makes sense to chunk out the Midgar and then the full world map portions of the game. Anything else in a straight remake scenario is just a concession to make money.
Part 1 will not be 'disc 1' because disc 1 contains the entire game world and assets and uses almost all of them. I think people forget this. Midgar, and the entire world map and about 60-70% of the world map game is on disc one, and ALL of the resources for the entire game are on disc 1 excluding FMVs. Part 1 of FFVIIR will be probably be an extended version of Midgar, which in the original game was about 4 or 5 hours of stuff if you take your time, and as cool as Midgar is, it's a prologue. So they're going to have to beef it up considerably if they want to use it as a Part 1 type thing, which they will probably fuck up because all of their games are bad now compared to FF7.
The episodic nature of the game might not hurt the story too much (there are two cliffhanger points built into the story - leaving Midgar and Aeris), but it will fuck up the flow of the original game if they are going for a straight remake because the game is broken up into chunks like so:
- Midgar
- 20 hour section where you travel across the world and go to every meaningful location
- 10 hour section where you revisit numerous locations and do new things there
- ending section
There isn't really any way or good reason to do this in an episodic format because you need all of the resources for the entire game for everything post-Midgar. So if they're going for a straight remake, yeah it's gonna fuck up the game and make it less than what it should be.
If they're not going to do a straight remake then it won't be as good as the original game because Square Enix aren't capable of making a game as good as FF7 right now. It'll be a bunch of dumb bullshit if they try to restructure the entire thing.
I think they should just do it right and stop fucking around. If they really must do episodic at all, it should be FFVII: Midgar and then the full world stuff in another game, but they should really just do it all in one. They should be aiming for nostalgic europhoria with this, not a kind of 'oh well sure it isn't the way it should be, but wow it's nice we're getting this at all, right?' response. The episodic thing is just gonna fuck up their sales anyway. Just make it cheaper - you can skimp on some of the graphics a bit if you get all the other stuff right, nobody is actually going to care.