So can someone explain how this sidechain innovation project would affect projects like counterparty and mastercoin?
It's an enhancement and not a threat. You need to differentiate a few things: there are protocols like XCP and MSC and there is some kind of communication with the Bitcoin protocol, for example the initial proof-of-burn (XCP) or fundraising-for-dev (MSC), the several data-storing schemes like using multisig transactions to encode transaction information or the DEX which directly interacts with the Bitcoin layer. It appears they are building the groundwork for an even more frictionless communication between Bitcoin and X.
non-technical so explain like I am five

- can we simply take all our msc/xcp/assets and move them to the new sidechain?