Often times, people try to win the prize, knowing they'll on average make a loss, but doing it out of fun. See e.g. Google Lunar X Prize.
They are showing in practice that they are willing to pay huge amounts of money for "outsourced" R&D; sure, a prototype stage is worth less than an implmenetd product, but $1m or more seems to be a reasonable and affordable ballpark for such offers from the "buyer" perspective.
The remaining question is if ~$1m is an appropriate amount for the inventor, given the effort required - but that seems very subjective and depends on each individual inventor and their location; in many countries you could fund a whole research laboratory of a good university for $1m.
In The Nature of the Firm [1] Ronald Coase wondered why companies didn't contract out instead of having employees and why indeed firms exist in the first place instead of using the movie industry system.
His answer was that there are transaction costs associated to using the market. There are also other costs such as search/informgation, bargaining, trade secrets,.. The costs of going to the market makes it less attractive. He got the Nobel Prize for that.
Internet lowers that cost and makes it possible where it was impossible before. It's definitely a new opportunity companies don't exploit.
Kaggle [2] does it for predictive modelling.
[1] https://en.wikipedia.org/wiki/The_Nature_of_the_Firm [2] http://www.kaggle.com/competitions
As a side note, this kind of thing very much reminds of me 'nwavguy'. An anonymous audiophile who created a cheap and stunning piece of hardware.. Sometimes a single guy with the right motivation and knowledge can innovate.
"NwAvGuy boasted that his minimalist amplifier—which can be purchased for as little as $129 — “proves you don’t need exotic parts or esoteric circuit designs for best-in-class sound, accuracy, and performance.”"