The fate of "Cinderella III" is uncertain.
I'll admit that I've only actually watched one (maybe two) of the direct-to-DVD sequels (one of the Aladdin sequels, when I think it was a new-ish idea). It was clear to me then that the quality level just wasn't there. I'm sure for the budget and timeline they were given, the people responsible did an admirable job, but it didn't compare with most of the theatrically released animated movies (at least not the ones for which these sequels were being made).
Here's the story on CNN Money. What's interesting is that in every version of the story I read, the move is said to have been influenced largely by Steve Jobs and John Lasseter, both having come to Disney via Pixar. I guess it makes sense, in a way: I love Pixar, and think they know a thing or two about storytelling via animated movies. Jobs is on the board of directors of Disney, and is the largest individual shareholder in Disney. Lasseter is Chief Creative Officer at Pixar and Disney Animation Studios. So they have some pull. But it can't have been an easy sell to shut down what is, I believe, a money-making product line.
Does this endanger the franchise quality of characters from Disney animated movies? I don't think so, but it might change things some. Kids at Disneyland get excited to see Belle and the Beast; I think they would even if they haven't watched Beauty and the Beast - Belle's Magical World or Beauty and the Beast - The Enchanted Christmas at home. As a kid I got to know some of my favorite characters well by repeated viewings of the original. (I know, beware the argument that is based on "it was good enough for me.")
I say, if there is another story worth telling with the characters and world of an animated film, let it be told in another theatrical release (or as a Disneyland attraction, of course). Toy Story 2 was a great movie.