Instapaper’s biggest appeal on the iPhone is that it works offline: even on this device that’s considered an always-connected “internet communicator”, one of the most important features an application can have is the ability to work when it’s not connected — or in a way that won’t use the connection even if it’s present.
I was the only person doing that at first, but people are demanding it for other apps as well. The New York Times recently added offline caching (although it needs work). Evernote has been criticized since day one for not having it, and I’m sure they’re working on it. And Apple left these gaps wide open since Safari and the YouTube app hardly cache anything. (There’s definitely a market for an Instapaper-like “watch later” service for videos… I don’t want to make it, but I’d love if someone else did.)
It’s interesting that Apple gave us nearly-universal connectivity, or at least as close as we can get with today’s infrastructure, but it’s still so slow and unreliable (through no fault of Apple’s) that it’s a huge benefit for people to be able to bypass it.
(The iPod touch also exists.)