Just because a company offers a service for free does not give it the (moral) right to try to sneak in changes to what you signed up for as a customer. Unfortunately, legally they can pretty much do whatever they want as long as they include enough fine print that nobody ever reads in the ToS. I think you are arguing from a legal perspective, which you're absolutely right about; I'm talking about "the right way to treat your customers" perspective.

If I as a customer pay any amount (including $0.00) and agree to the terms of service, the company should honor those terms, or, at the very least, be forthcoming with how they will handle my data.

The reason people are angry is because:

a) They didn't have any inclination of how Instagram will try to monetize. I think you are giving users way too much credit in how these startups work (ask your non-tech-savvy friends how Facebook or Google make money; I guarantee you will get blank stares). The customers who joined before Facebook took over signed a completely different set of ToS. Again, there is nothing obliging them legally to grandfather these customers, but it's not a nice thing to do "Thanks for the ToS. Btw, Facebook took over, so good luck!"

b) They tried to sneak in the changes and got caught. Nobody likes to have stuff done behind their back, so a big announcement with enough lead time to switch services would be nice. I don't use Instagram anyway, but I think this applies in general in how to treat your customers.