The Verge had a great summary (as posted above) so I won't go into the actual 'law'. I don't even think the issue is really about what they can or cannot do in the license - Instagram is entitled to write whatever they want in the license agreement, and the original TOS was drafted in a very lawyerly way to basically allow them to do almost anything (advertising-wise) they wanted with your photos anyway.

The real interesting part is that users are willing to make a lot of noise about these license agreements without reading them. I think there's a lot of pent up FUD about license agreements because there are so many of them out there that nobody ever reads any of them, and there's a big appetite out there for somebody, anybody, to clarify these terms for them.

The consumer group-think goes kind of like: "What can Facebook do with my data? I don't know, but I'm sure their lawyers put something in the license agreement that I'm never going to read or understand. Oh, this blog says it's really bad, time to complain loudly!"

I think the result is that there really needs to be an effort on the part of these online service providers to clarify their terms and make human-readable summaries of users' rights/licenses so that everyone understands where they stand contractually.