I actually like this idea, as long as its implemented correctly. Say I buy 20 games a year normally. I'd say that a good 60-70% of them I wish that I hadn't (latest waste of money was Halo:Reach). So if I can try the first 1/4 of the game for free or very cheap, and then decide if its worth it, all the better. Even if the good games end up costing me $100 a piece, that still cheaper overall than spending $60x3 just to get one good game. If I can optionally buy all of the content outright for a discounted rate, all the better for games that I 'know' will be good.
This could also make the quality of games better since you'd get to try it out first. Companies couldn't just put a shiny finish on a crap game because people would not buy it. It should help out indie developers by giving them a chance to have people try their games. It could also reward innovation and risk taking.
The way this would fail is if the initial installment is so small that you can't really make an informed buying decision. Or if they just start charging for every single thing in a game. For example, playing an FPS where you had to use real $ to buy weapons would be too much.