Yes, it's true that some people misunderstand them, but it's a good thing that these terms have clear and widely understood meanings (compared to something completely vague like, say, "agile") and so we should promote correct usage rather than letting them drift.
Who benefits from watering them down? People who want to take advantage of confusion to release their software under weaker licenses while taking advantage of the "open source" or "free software" names.
Who benefits from watering them down? People who want to take advantage of confusion to release their software under weaker licenses while taking advantage of the "open source" or "free software" names.