Pulse, Pocket, Reader for Safari, Readability... lots of apps do the same thing.

Part of the answer is that Instapaper was one of the first to offer a time-shifting app and that its creator, Marco Arment, is particularly assiduous about regularly releasing useful updates and improvements. He is also a one-man team, which helps people personally connect to his business (people would rather give their money to a person than a faceless company).

The other part is that Arment is very good friends with a lot of high-profile Apple bloggers (Ben Brooks, John Gruber, Shawn Blanc, MG Siegler) who drive a ton of traffic to his site and app by praising it on their blogs. This also creates a lot of positive buzz and hype. He has been widely praised in traditional media circles and interviewed by papers like the NYTimes. The recent Starbucks promotion is another major marketing coup he's managed to pull off.

The long view is that the free services do not have a business model or revenue stream, and thus it's unclear how they'll continue to provide the service they offer without eventually being bought out by another company, monetizing via advertising, or charging a fee. Because Instapaper is profitable, Arment can continue to develop and support the software without compromising on user experience. That's reassuring to many.