Analysts, however, say users are probably too addicted to what is becoming one of their favorite social media sites to make the company suffer.
Late on Thursday, Instagram co-founder Kevin Systrom announced in a blog post that executives would sack the change and revert back to the original policy.
The move came after a user uproar over the changes that included allowing Instagram to use or sell user photos and information for advertisement deals. Angry Instagram users vented their frustrations on Twitter and some high-profile users, like singer Pink and National Geographic vowed to stop using the service.
"I WILL BE QUITTING INSTAGRAM TODAY. WHAT A BUMMER. YOU SHOULD ALL READ THEIR NEW RULES," Pink tweeted.
Earlier this week, Systrom posted in a blog that the brouhaha was all a misunderstanding and he asserted that the company, which was recently bought by Facebook, would not be selling users' photos without consent.
Among others, Dan Olds, an analyst with The Gabriel Consulting Group, didn't buy the explanation. His view earlier this week was that Instagram was backpedaling more than clarifying.
Then last night, Instagram scrapped its plan for a new policy all together.
Patrick Moorhead, an analyst with Moor Insights & Strategy, said that Instagram has in one week tarnished its once gleaming image.
"I think they're looking foolish," said Moorhead. "It's good they backed off or it would have been a debacle. It would have been a face-off between consumers and Instagram. And when you're supposed to be a friendly social media site, that's never a good thing. It's something that could torpedo your brand."
Instagram's image has taken a big hit, he said.
"I think people originally had thought of them as this small, successful, friendly startup and now they don't look any better than Facebook or Google...," he said. "There was some purity that Instagram had. It's not just me. I believe that they've taken a chunk out of their brand."
Rob Enderle, an analyst with the Enderle Group, agreed that Instagram has burned itself.
"Instagram appears to subscribe to the theory that learning from others' mistakes isn't nearly as much fun as learning from your own," he added. "In one single foolish decision, they destroyed a large portion of their value."
Both Enderle and Ezra Gottheil, an analyst with Technology Business Research, said Facebook, which has more than its share of user uprisings, is getting a good chunk of the blame for Instagram's mess.
"I think it will occur to many people that Instagram did not have a reputation for sudden thoughtless moves, and Facebook does," said Gottheil. "This was pretty bad. They reminded users that they are just units of production."
However, none of the analysts think this will be a long-term problem for Instagram. After all, Facebook remains, by far, the largest social network in the world.
"I think there will be a short-term hit..., but I don't think this will have major long-term implications," said Moorhead. "For many people, it's like a drug. They just love it."
However, he said, if users have lost a sense of trust with Instagram, they may be more apt to try out alternatives.
Sharon Gaudin covers the Internet and Web 2.0, emerging technologies, and desktop and laptop chips for Computerworld. Follow Sharon on Twitter at @sgaudin, on Google+ or subscribe to Sharon's RSS feed. Her email address is email@example.com.
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