I don't understand the hate for this episode. Sure, it is different, but my gosh, this whole series is in a genre that is already outrageously different from almost everything else in broadcast television.
This is NOT like some of the other "musical episode" efforts of other series, where people just, for absolutely no reason at all, start singing or dancing. This effort simply takes a page from the stunningly good (and well liked/received) Buffy the Vampire Slayer "Once More, with Feeling" episode. That episode worked because it was not just a bunch of people singing, for no reason at all. In the BTVS episode, they were singing (and dancing) because of a curse (over which they had no control), and most of the songs were actually dark confessions. And with a few exceptions, most of the singing was not played for laughs, but instead, depicted lyrics/confessions that were heart-breakingly sad.
That is exactly what is happening in this Fringe episode, except it's all about Walter (finally) verbalizing/confessing the many things that he has avoided facing, for the entirety of the series up to this point, as well as (accurately) assessing the state of mind of all the important people in his life. Specifically, with respect to those people (family and otherwise), it's also about his perception (which is spot-on) regarding the state of their interpersonal relationships. Walter simply chooses to express his assessment (and, bare his soul) in the form of a story that he tells in order to entertain Ella. And, because music has always been an obsession of Walter's, it should not strike anyone as unusual, that he quite naturally makes music a part of the story that he spins out to Ella.
Far from "jumping the shark", I personally think it was a great way to assess where everything stands (especially with respect to those relationships), before the series takes a "hard right turn" in the following episode, and finally leaps, head first, into the multi-universe story line that will be a major focus throughout the rest of the series.