If it were dead, it wouldn't even be around anymore. If it were dead to everyone, it wouldn't exist today.
The Sonic series is the only series I know of that managed to recover after constant disasters in the mid-decade 6 years ago and in the gaming industry, that's saying a lot. If "nostalgia" was the only thing Sonic managed to survive off of, people wouldn't be looking at Sonic Colours so highly compared to previous titles.
And yes, the franchise is improving, whether one likes it or not. If you're not liking it, then that's fine, but you have to agree that just about anything is better after the trainwreck game in 2006. Sonic Generations, which is an anniversary title, is a whole damn lot better, if not one of the best Sonic games around.
It's not surviving off nostalgia alone. There was a massive boost in improvement in the main games starting with Unleashed that made it feel like an actual Sonic game, a lot closer to a new formula that people would like. People have noticed, whether they've criticized the added Werehog gameplay or not. It only got higher from there. The handheld titles remained steady which helped Sonic survive over 2006.
People still enjoy playing Sonic today and it's regaining some of the ground it's lost. Few critics still have Sonic as their targeted *****boy because of his dark days up to the point where many people recognize that they're only beating a dead horse. The Sonic Cycle died years ago. The games still have their own share of faults but so does every other video game ever made.
Sonic no longer needs nostalgia to survive, so if you don't like how SEGA celebrated the hedgehog's 20 years (and still standing!), then that's fine. You call it a cynical cash grab, I see it as a game with a lot of heart and hard work put into it to appeal to everyone while paying special attention as to what people wanted.
They aren't increasingly putting him in 2D situations either. There's almost always a new handheld game every year or two, and the main 3D titles tend to take a few years in development, while spin-offs are handled by different teams. Sonic does work in 3D, and Generations gameplay and level design prove it.
I won't deny the subpar plotting and dialogue in Colours and Generations though, especially the former with the latter: so much wasted potential for a solid plot, yet it was practically bareboned.