I think you're right to question the profit potential of an improved Flickr. But I think there's still room for a massive archival service that is separated from Facebook and handles the kind of instant photography provided by Instagram. Instagram's photo archiving interface is still pretty limited.

I think if you ask the average digital camera owner what happened to all the photos they took, they would say they haven't yet downloaded them from the card, nevermind uploaded them and categorized/described them. I use Adobe Lightroom to manage this process, but it's still klunky, even for a prosumer like me.

Facebook has a huge advantage with its social network...but it's not yet designed to handle photos (i.e. there's no searching for photos, albums are limited to 200 photos, jpg compression is poor, and you can't label/categorize photos). A service that provides a slick way to archive and manage massive amount of photos is still needed by the average user. In fact, I'd say the need has grown, as photo-taking opporutnities have exponentially grown, without a corresponding growth in photo-archiving services.

Dropbox is not a real alternative, except as a backup.