Say what you want, the filters do actualy make your photos look better in this case (though it's quite easy to overuse the fakey tiltshift thing). _Especially_ poor pictures get quite a boost, albeit a cheap one - the filters are quite good.
But it's really not about the filters with Instagram. Not sure why people keep thinking it is a filter app. It is a social app. If you pick a filter, you agree to post the picture in your stream. There's no using the app without sharing your work – though of course you can delete the picture from your stream and keep a local copy. Nevertheless this leads to a lot of people sharing their life, their work and their art in a mainly visible manner, very similar to a picture-only twitter, that's actually put together more smartly than the filter engine.
So the company doesn't have a "stupid free filter app", it's got a close-knit, large community of people that are willing to share their art, photo's, life with this app. Many of these have a huge friendlist, and some seem to actually live off the likes on their photos.
I have no idea how to make money out of that without tearing down the community spirit, though, just addressing the 'what use is another stupid filter app'? brouhaha.
(Yup avid user myself, did you guess? Find me under @_naam).