Well, I grew up calling my step grandmother by her first name since my grandparents had been divorced for years when I was born, and it never seemed weird or awkward to me. She doesn't have biological grandchildren either, but I don't think it bothered her. I think a lot of times adults project a lot of symbolism and baggage into the language and terminology used by children, but I think it's ultimately arbitrary and doesn't have any effect on the relationship under the name. Children are adaptable.

Now, if it does upset the step-grandmother to be called that, that's another matter, and the son should consider a compromise, which it isn't insane for the LW to at least suggest, something along the lines of "Have you thought about how she feels about it? I hope we aren't hurting her feelings. If you aren't sure, maybe you could just bring it up in case she wants to get something off her chest?"