The assertion is that, for a billion dollars, Facebook should be able to create a significantly better app and market it better (or 'at all') than Instagram do.

Facebook have got 721m users and all the data they need to constitute incredible market research. In twelve months if Facebook couldn't build an app which is competitive to Instagram, and get it installed with ~5.5% of their user-base, I'd be really fucking worried.

Also consider this: Twitter add "Photos" to their filtering options adjacent to "Connect" and "Discover". So you can just click a Photo button and see all your connections' photographs in a stream. Oops, they just went halfway towards creating most people's Instagram experience.