That is bad news for anyone who tries to get long-tail organic search traffic. It's good news for sites with great brand names, but terrible news for anyone else.
AFAIK, Google views their relationship as symbiotic, not parasitic.
When you think of how many struggling freelancers use those long-tail guides to build their business ("How to shoot a commercial for a gym," or "How to write brochure copy for life insurance,"), you can see the magnitude of this problem. People who could trade their time for traffic now have to trade their money for traffic. When they're just getting started, money is harder to come by than time. The result: fewer people creating this kind of content, more of them joining organizations that pay for the traffic instead.
All in all, I still think this is primary a Google problem, not Demand's. They can publish anything they want, it's their right protected under free speech. It's Google which should be concerned about quality of their pages.
You are correct about this being Google's problem. These guys exist to exploit an arbitrage opportunity: Google's search algorithm picks them, and the average searcher's which-engine-do-I-choose algorithm picks Google. In the long run, one of these things will stop being true.
Their model is similar to Demand's in that it is UGC + payment, but that's about it. The topics are not generated by an algorithm, for instance.
I was surprised, too.
The result isn't Pulitzer worthy, but its a lot better than you're making it out to be.
Using your example, here's the wikiHow article on "how to make pancakes":
http://www.wikihow.com/Make-Pancakes
Its quite informative. How would you suggest they improve it?
This kind of frustrates me to the extent that I compete with Demand Media (limited, but real), because there is absolutely no circumstance under which a Demand Media article is a better result for the user than a page on my site if we're in competition, but Demand Media has the economics of it nailed such that they can produce content for some genres at scales I can't possibly keep up without duplicating their core strategy (automated keyword selection -> cheap freelancer -> post without substantial quality control), pushing my related content out of the SERPs and then charging me for the clicks I would otherwise be getting for free.