As I said, they'd probably have difficulty operating as a blatant competitor to iStockPhoto, but I think if they'd structured things with a modicum of cleverness, their old ToS would allow them to get away with most of what's explicitly covered in the new ToS.
I've seen this observation mentioned a few times on HN and it seems quite right. The letter of the law may say this or that, but ultimately it comes down to some form of the giggle test. You have to imagine a judge saying, "You didn't really think that's what the law|contract meant, did you?"
For example, people trying to avoid penalties for unauthorized distribution of copyrighted material by claiming they own the copyright on certain large integers or are merely passing _numbers_ around, not movies or songs.
With the boilerplate TOS there may be all sorts of things that one could imagine are allowed but I'm pretty sure Instagram's (i.e. Facebook's) lawyers thought that the original phrasing would not be sufficient to clearly allow them to do what they wanted to do, so it was changed.
TLDR - Before: Instagram had to have clear collaboration.(which would limit how many people they could sale your photos to.) After: Instagram does not have to show clear collaboration.