First, this is a Facebook issue, since Facebook owns Instagram. The coverage of this has tended to ignore or downplay that fact.
Second, Facebook has a long record of treating users’ rights and privacy in unfortunate ways. It doesn’t surprise me that they’re doing it again. I would expect, in the next few days, to see Facebook/Instagram follow the standard FB playbook: Take one step back, having taken three steps forward, and call it “listening to our users”.
Third, a user of the Instagram app should not have to make a choice of either accepting such sweeping terms or quitting the service altogether. (I use neither Facebook nor Instagram at this point.)
Fourth, this is a clear example of why we should be willing to pay for some software and services. I want to be a customer, not a product, and I’m willing to pay for that — but increasingly I’m not given that opportunity.
Finally, this is a great opportunity for Flickr or other photo services to create a more user-friendly ToS, and lure people away from the sites that don’t.