Yes, I'm in two minds about this as well. I think these kind of design contests (and I'm thinking specifically of the ones on Sitepoint) can have value for designers starting out. In the class I teach, the trainees sometimes enter these competitions and a couple of them have won, so they receive a bit of cash but importantly they also have a little bit of real world experience to put in their portfolio - so I think that's useful.
On the other hand, the people offering prizes are getting a lot of work done by lots of people for very little money, which seems a bit "design sweat shop" to me.
So it's "horses for courses" - I don't enter the competitions but I don't think there's a need for our livlihoods to feel threatened. (Famous last words!) I'm sure there will always be people who will pay for good design skills.
I've seen a number of design competitions on there related to irish sites and I just know that the company is getting paid a hell of a lot to design a few of those sites. They are throwing it up there for 200 quid ... and it makes me go WTF!!! (pardon my french)
Do people getting sites actually care if the site was done for 200 quid and they pay 5k to someone ? I'm always curious what'd happen if people told the clients oh yeah I saw your site design up on a competition.
I have to admit at times I've thought about entering a few of the competitions (for fun) see what people think of the designs but I haven't.
A lot of what I see in there seems to be stock icons dumped onto text a lot of the time. Though I must admit some of the designs can blow me away. At the moment I've got to work on a logo and I know its gonna take me a good bit of work. I just wonder if it'd be worthwhile throwing it up there at times.
Have to say I agree with jennyrusks, I don't think there is any risk to any real designers. As a young developer in college, though I'm not much older now, I made a enough money from doing these hand down jobs. And as jennyrusks said, it gives young people a lot of real world work and depending on the rules of the "competition" you can also add the work to your portfolio.
In fact, I once did a huge job for a very very large multinational based in Kildare, that was one of these handed down jobs. I'm quite proud of that really, but unfortunately I don't think I can get away with putting it on my CV.
So I'm kind of for it as long as it doesn't get out of hand. Which of course it wont because market forces will keep it honest.