It also completely ignores the fact that paying customers get ripped off all the time, by the companies they pay money to. In the wider perspective, being a dick doesn't seem to correlate to receiving money from your user-base.
Here's an excellent text about it: http://powazek.com/posts/3229
I agree with the first part but not the second. What if the best way to show respect for your users is not to pester them with ads and offers, but to let them pay you directly for the value you are giving them?
There would have still been outrage, but people pay to get rid of ads on services all the time.. particularly if they want to continue a streamlined experience. If not, they can tolerate the ads. But using my photos as ads? If I opt-in, sure. But I don't want that by default. I'd rather see something irrelevant than have my likeness potentially supporting a business I don't want to.
There are companies which - by most people's standards - quite reasonably make money from free services. Telling people that they're all stupid sheep for using Google isn't going to get much traction. We need to highlight real problems, like this move by Instagram.
Lots of us also work on open source software, in which case telling people not to trust anything that's free is shooting ourselves in the foot. I don't pay for Linux, Libreoffice or Firefox, but I'm not 'the product' there.