For those of you who don't think this is a big deal. Instagram is explicitly stating that they're going to sell the use of your pictures to third parties. They're also going to start showing ads in their news stream. I know the pictures are of too low quality to be plastered on a billboard. That's not the point. What I expect they want to happen is something like this: I post a picture of me drinking a Coke to Instag…
I don't think this is going to be a popular opinion, but keep in mind that Instagram has untold engineers and UI people, all of whom are fairly expensive, and this advertising clause is really in lieu of a licensing fee, not something consumers provide "for free".
I'm not really in favor of the business model, but in a world where apps are licensed at 99c I think models like this are to be expected. To fix this problem, we would have to return to a system where the costs to develop software are paid by the people who use it.