It was a picture of Prince, modified by coloring and outlining. But it's use (selling it) was again to represent Prince, for commerce, not some other subtle meaning/parody/social commentary. I can see the argument in favor of the photographer.
If I take a photo, and you modify it and try to pass it off and sell it as yet another photo - clearly not distinguished and derivative.
If I take a photo, and you create an artwork or video game character based off it - clearly distinguished; I don't have any right to your IP.
If I take a photo, and it inspires you to take a similar photo for your personal collection - clearly distinguished.
If I take a photo, and it inspires you to take a similar photo and you decide to sell it as your creation... ambiguous, as there is a market conflict.
Perhaps Campbell soup shouldn't be Xerox or art either?