Is it that most of the designers don't get paid at all or the lowish price that the winner gets that offends?
There is a huge appeal in having a designer "try out" - I've been burned by designers who couldn't get the work done to my satisfaction. It was a waste of my time and money. It would have been very easy to weed them out with a simple "audition". This seems entirely legitimate to me. I've ben asked to write code prior to getting a job, for example.
As for price, I've been quoted $3k-5k for a logo and $15k for 4 pages of html. That is never going to happen. I might pay $2-300 for a very good logo, and maybe $1500-2000 for a very good set of HTML pages. That is simply the value I place on the services.
I hate to be the guy who doesn't respect creative talent, but I can't ignore what the marketplace is telling me. Designers really seem to hate the crowdsourcing model, and I want to work on terms that they like, but how? Saying "pay me more and take the risk that I won't work out" is not good enough - as evidenced by the success of 99 designs, et al. If designers want people to abandon crowdsourcing, they need to come up with a better low-budget alternative.