Here's my reading:
(1) Twitter started off by pissing off its API users.
(2) Instagram, a company that is by most means excelling because of a great product and focus, takes the bait from Twitter and runs all over its own users and compromises its core principle by making their product shittier. Instagram thinks significantly fewer pictures will be shared on twitter overall as a result--a risky assumption.
(3) Twitter rolls out its own photo effect service and gets to be seen as the nice kid on the block. Meanwhile, Instagram Corp. remains confident Twitter's own feature can't touch its engagement though objectively, this may be a risky bet.
(4) app.net jumps in telling the Valley "TOLD YALL!"