Simple explanation though: As a buyer, design contests are great. Plenty of ideas and you only pay if you see something you like. As a designer, design contests are awful. Most people don't get compensated for their time and it gives some people the idea that they should only pay for your time if they love your work.
I used 99designs, and I agree with you on the designer end. Not so sure about the buyer end in this case. If you offer $x, to make it worthwhile each designer has to "spend" ($x)/N dollars to submit, where N = (avg # of competitors). So you end up paying $x to one designer, yet each designer only "spent" a small fraction of that to make their submission. In other words, you get tons of low quality submissions.
Your hope is that with the diversity, either by chance a hastily made cheap one will be decent or that someone will take a risk and "spend" more than ($x)/N dollars on your submission, hoping for the full $x. It usually works out "okay," but there is a good risk that you as a buyer won't get exactly what you're looking for.
