You could just write the app and keep the profits yourself, you'd lose the free publicity but you'd be the best instapaper app for android anyway.
No, you couldn't, as you wouldn't have access to the API.
The article mentions you can pay a fee to get access, is that not so?
This is for users, not developers.
Third party developers can only develop apps using the official API that paid-for users have access to. The official app doesn't require a subscription.
You've got an established brand, established channels for publicity, all the backend stuff covered, a completed API and all of the specifications worked out for you? And you'd not be happy to collect half the proceeds in perpetuity? I'd be thrilled with a quarter of that action. 50% is generous.
That sounds like an awesome deal to me. This guy has already built the business. It's turn-key. Hell, if I were an Android developer, I would start tonight.