There are some negatives--refinement of designs is not really part of the process, the way it is when you work with a single designer. I've found that most of the designers (by necessity) spend a few minutes whipping up a few entries. If any of them get good feedback, they'll polish them a little, and hope for the best.
But, the positives are that a surprisingly large number of really good designers will submit work. We've been very happy with all of the contests we've held. We got a new logo for Webmin for $500, which turned out awesome. Likewise for a logo for our new virtualization management product. I'm planning to get some banner ads made next.
I've worked with designers in the past, and even in cases where I love their work, in general, sometimes they just don't have the right idea or execution for a particular project. The contest model allows a lot of designers to toss out their ideas. And, honestly, it's a lot more like the way large corporations have their design work done. Design shops, the really big/famous ones, will frequently do some mockups before any money changes hands...design i very often done on spec. Us little guys don't have the million dollar design budget to throw around that allows us to just call up our favorite five shops and say, "We're doing a new campaign. Show us your ideas." A contest site like 99designs.com allows us to effectively do that.