I entered my first comp. last summer (Alabama Brew Off) and had pretty much the opposite impression from the OP. Five bucks per entry, $1000 award for BOS, very nice medals, and a free pint of craft beer at the pub where they had the award presentation. They ended up with a little less than 250 entries, which comes to less than $1250, so I don't think they could have done it without some sponsors. I was well aware of certain minor flaws, even in my winning entries, and the judges picked up on them quite accurately. For example, my Maibock was a little "boozy" and "overly bittered" yet won gold in a field of 11 bocks, so there were probably some pretty lousy bocks to taste in there. I won 3rd in a field of 21 American Ales with a beer I thought was pretty mediocre, but I had some around at the time, so I thought "what the heck? I'll submit it." I really didn't get the impression the judges were sitting back basking in deliciousness all day.
I really enjoyed meeting many of the judges and other entrants at the awards banquet and certainly got the impression the judges were generally very competent folks who love the hobby enough to put in a rather hard day of work carefully judging beers. I live far from the big city and don't have a local homebrew club, so I thought it was a nice experience just to meet other homebrewers and be involved in the event.
Now this is more along the lines of a brew competition that I could get on board with! I will keep my eye out for this kind of setup, thanks!