I definitely agree about the quicker releases and a full game release upon completion. I suppose it's just a matter of really understanding your distribution and presentation to build a community that appreciates the episodic releases. In fact, I will say that studios that do episodes tend to have rather faithful followings, so I can see that being an interesting way to craft a very loyal fan base. Either way, I love seeing things like what your friend handled it. Shifts in perspective is a wonderful storytelling technique used in novels, and applied to games it makes even more sense to do that with an episode, so I can really see some cool things being done with that.
I do think you're right for the most part about people having a distaste for the "to be continued" type of thing. I think it comes down to making sure the player is completely satisfied with each episode, and the next episode offers them something more. Unless I suppose you're that quick about releasing episodes, the "to be continued" part may not hurt people’s feelings so much (but at the same time, even television is making a shift away from episodic releases, so maybe entertainment is evolving beyond episodes? That certainly changes how the public would view games trying the same).