To help us deliver interesting paid or sponsored content or promotions, you agree that a business or other entity may pay us to display your username, likeness, photos (along with any associated metadata), and/or actions you take, in connection with paid or sponsored content or promotions, without any compensation to you.
In other words, they're trying to monetize Instagram a similar way Facebook is - Sponsored Posts - your photos and associated data can be promoted by companies without having to notify you about it.Furthermore under Section 106: Exclusive rights in copyrighted works aka. 17 U.S.C. § 106[2] Instagram cannot sell your photos and it cannot use your photos and alter them in any meaningful way.
Having said that Instagram could have communicated this better as this hasn't helped the situation either.
[1] http://instagram.com/about/legal/terms/updated/
[2] http://www.copyright.gov/title17/92chap1.html
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NOTE: Also posted this at: http://news.ycombinator.com/item?id=4939650