Almost all of the photos that people are filtering are uploaded straight off a phone. Generally the cameras on these devices suck. You get tons of pixel noise, weak colors, and relatively low resolution. You also don't get much in the way of creative control, such as the ability to play with depth of field and exposure.
Filters cover up these flaws. You no longer see all the noise and general crappiness after taking a photo blurring it, overlaying textures, and then blowing out the color. Plus they give you a bit of creative control. I think that's the reason that these apps are so popular.
Filters are quite a lot of fun, but they can't turn a crappy photo into a masterpiece. At best, they turn a bad photo into a mediocre on, or a decent photo into a good one. You can alter the mood, but in the end the subject matter needs to be interesting.
Not to say that filters are inherently bad. The "Mastergram" blog (http://mastergram.tumblr.com/) has some excellent examples of how masterpiece photos can be altered by Instagram but still retain that je ne sais quoi that made them masterpieces in the first place.
Nick - I don't think the goal is to make a masterpiece.
Anyone with a smartphone is no more than 5 feet away from a video capture device 24/7. For the first time in history hundreds of millions of people have the ability to capture and share video instantly. Unfortunately most people don't take advantage of this fact because they find video intimidating.
Socialcam is trying to break down the wall and make video fun. It turns out that filters do a great job of this.
Socialcam was featured a few times but still they're not ranked very high in the Appstore (#41 top free in Photography, not even top 1000 overall free). They probably have most of their downloads from the times they were featured. I'm not sure if I buy the hype. Video is a difficult problem to solve and I'm not sure if they've really solved much.
I made a mod for Oblivion back in the day that basically let you just add some filters to the game. It was way more popular than any of the gameplay mods I spent far more time on. People love filters.
Filters cover up these flaws. You no longer see all the noise and general crappiness after taking a photo blurring it, overlaying textures, and then blowing out the color. Plus they give you a bit of creative control. I think that's the reason that these apps are so popular.