Options have value in finance and in life. Instagram possessed the option to turn on advertisements inside the app, and the option to sell virtual goods, and the option to implement any number of other revenue schemes, which would have immediately generated significant free cash flow. The fact that they did not exercise any of these options does not mean that the options themselves are valueless.
A very significant open question, IMO, is could they have enabled any of those revenue streams without decimating their user base? I don't think they could have because their product is relatively easy to duplicate.
Given that Instagram was free, there was little incentive for anyone else who is serious about getting in front of people to bother duplicating what they had, but had they started in-app ads or anything else that would have irked users, that would have changed very quickly.
tl;dr -- Millions of users can be monetized in a number of ways, but not if your service can be duplicated fairly easily.
Well the usual catch is network effects. For instance Twitter is putting increasing amounts of ads into the feeds, but because everyone's there people will stay on for the time being despite the ad-free alternatives. I've never used Instagram so I'm not sure how strong its 'social' ties are.
