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Imageshack was used widely in reddit.

The problem was it couldn't handle the load and the link would just die. If a link would become semi popular, it would pretty much kill the imageshack source with certainty.

This was the main selling point of imgur. It didn't suck.

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The main problem at its core was that ImageShack was made for profit - while Imgur was bootstrapping as much as it could. Its not like those free services cant exist bootstrapping - its that founders need to do really good job saving money everywhere they can, avoiding profit and having some money in the bank account so whatever happens they wont panic. Sometimes when you see today start-up culture it seems like some people are not serious. Spending loadz of money on some unimportant services, parties, meetings, hotels etc. Its not like servers these days are crazy expensive - any startup could easily grown on Amazon/Softlayer with backup server from OVH. It wont ruin your budget as long as you commit yourself to spend money on what's important for 1-2 years until you get some funding or ads going on.

I'm pretty sure it wasn't that popular even back then (5-7 years ago). I recall users being chided for not using flickr because of how badly imageshack sucked. Imageshack was great for images you wanted to share on small/mid sized internet forums, but flickr was probably the biggest/best until imgur dethroned them. Yahoo! buying flickr probably didn't help much either. Though that's only anecdotal, I never used flickr enough to notice.

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