Don't people argue that basically all Star Wars movies and recuts post-1983 have basically just served to dilute the brand? I guess it's a bit more murky when you start arguing about the whole expanded universe of novels, video games, TV shows, theme park attractions, and whatever else.

But it does feel different when you invite new creators to step up to the plate and create new chapters in a story and then explicitly elevate those new chapters to the same level of canon as the original. This could even be said to apply to Lucas and the prequel trilogy, since Lucas did not direct Empire or Jedi, so the prequels were being made essentially be a completely different team than the originals (other than him).

All that to say— this could be done, but it would be really important to manage the branding of it. It's not an "LOTR sequel", it's "LOTR Legends — new stories set in Tolkien's beloved world", with the clear implication that canon 0 is LOTR, canon 1 is the Christopher Tolkien-edited works like the Silmarillion, and the "Legends" are canon 2. Anything not associated with the estate is canon 3, and the movies, video games, and TV show are not canon at all.