My problem with many poetry contests isn't as much the friends publishing friends aspect--in small communities, that's bound to happen; in the case of Cindra's chapbook that I published, I wanted her to have a book! (Well, chapbook.) And didn't think anyone else was going to do it. So I did it. (Incidentally, I "paid" her by giving her a large percentage of the print run, for her to keep and to sell on her own. That worked out pretty well.)
But the economics of the contests often drive me batty. Josh has a good post about it--one of the corrolaries to his fine point that, it's not valueless at all to figure that my $60 to a press for entry fees is helping subsidize a press, to put out these great books. But what if that $60 were spent on poetry books instead of contest fees? Then the physical object comes into play. Then you can lend a book. You can't lend a failure to win a contest to a friend.
Contests in poetry are not going to go away. But would we be better served if there were no massive prize payouts but smaller (or nonexistent) entry fees, and/or giving the winning book in exchange for the entry fee? I think so. The economics become much more tenable with a Few Simple Modifications (which some presses already do). It would at least be a start towards developing "fair trade" principles with the economics of poetry.
But still, I think that the contest mill has helped to cause the decline of the poetry readership, simply because there's only so much money to go around. Playing the first book contest mill is expensive, and you have to make a choice, if you want to play that game, to play it HARD, ruthlessly, and to win in that contested space. (And if people have plenty disposable income to do BOTH, then that in itself is limiting the field according to predicatable class-based lines).
Better in many cases to publish a book yourself, make it look like a "real" book, design it well, use a good font, and built something amongst the barrels of tea thrown in the harbor. Too expensive? Use publishing on demand--NOT the ripoff faux-vanity presses like iuniverse, but something (like Lightning Source; although I've never used it myself, so I can't wholeheartedly attest to its use) that uses POD as a technology--one that coaxes niche projects into being. And like it or not, poetry is a niche project. POD and poetry are pretty much made for each other, but sadly the only press that I've seen that uses POD also puts a contest scheme overlay into their press! Just sad. So with a POD book, say, printed one-by-one from Lightning Source, with a poetry press that uses it, you'd have: no prizes, open submission periods, no entry fees, modest royalties, but a pretty decent looking book at normal poetry-book price, plus availability through Ingram, availability on Amazon, etc. And the rest would be up to the press, or the writer, in terms of review copies, readings and the like. This is the future.
The funny thing is--what attendant benefits are afforded onto a big winning book? Distribution in lots and lots of bookstores in the country? Er, no. This of course, is not to deny that good books DO get published through this system of contests. If anything, it makes it even more criminal that the distro system has shrunk as it has, and that getting a good book published by a "good" press doesn't mean that that press has the means to muscle into places where it's needed. It means that this book will probably be just as forgotten in 5 years as a self-published book that has no prize aura to it. Here's another way to look at it: what if a winning writer fed that $1000 or $2000 or whatever into promoting the book, getting the word out through all sorts of sundry means, trying to drive a sliver of a wedge into popular consciousness through poetry? Ah, the winning writer might say, but I need the prize to make up what I lost through paying 20 other contest fees! And so it goes.
The only question is when the present system will collapse under its own weight, not if. There is going to be, at some point, a price point crossed in contest fees that the ephebes and new writers will turn back from (could you fathom paying $40 for a contest fee and getting nothing in return? Just wait until 2008!). And then it's over, 's been nice knowing you. This might be done by something as simple as the rising cost of paper creating a domino effect, with the cost passed to the "consumer" (that is, the submittor). From that wreckage, there will be a vortex in press-collapse. And it's not as if arts funding is going to get any easier over the next decade! The contest mill seems great now, and even seems necessary and perfectly reasonable, but it's, at best, a stop gap measure that somehow morphed into the only game in town (or one of the few).
American poetry deserves better.