Preamble: Two years ago, there was this discussion brought about by the Vancouver Fringe, and the other festival with their usual rant. I wrote this then, but didn't post it because it was someone else's space rather than a communal space. I feel like an invader posting a longer bit in someone's comments. Yes, it's ironic that I am now posting it on my space.
There's a word for festivals where the artists don't pay: Juried. The festival hires the artist, paying a lump sum (though sometimes it scales to ticket sales), and takes the risk. The artist just has to sit back and perform.
But since there is a risk, the festivals will be selective. They won't choose things that appear to have limited appeal, they won't choose things that may require extra effort to fill the seats, they won't choose unknowns, and they won't choose things that may turn away the audience.
Those festivals want to recover their investment, so they choose acts that will fill the seats and bring in the revenue from tickets. They may take some risk, "this is wonderful, people should see this", or as a token to emerging artists, but they count on the profits from the rest of the lineup to compensate for any losses on the unknown. Risk too much, and the festival or other presenter goes under.
Of course, since the festival has preselected the artists, they can charge more for tickets, since the act is now a known quantity. The audience is willing, and indeed may be lured by something they can know someone else approves of.
In response, an artist may set out to produce their own show. Find a venue, make it into a performing space if it isn't already, rent or scrounge the chairs and technical equipment. Find someone to run the technical equipment, and people to promote the show and sell the tickets. The artists have to pay up front for all this, and unless they have a show that will attract the audience, and do the promotion to get the potential audience to buy those tickets, they risk losing their money. Not even just not making a profit, but losing the actual investment. They risk their own money, but trust their own art enough to hope/expect good ticket sales.
Fringe Festivals are a form of the latter. They are a framework for artists to present their own work. The Fringes aren't benevolent in "returning box office receipts to the artists", they are merely selling the tickets on behalf of the artists.
The artists have sub-contracted their space and sub-contracted the technician from the Fringe, and get some general publicity and ancilliary help from the Festival. But just as the previous example, the artists have to get out and do their own promotion, or else they won't sell tickets to pay for the investment they paid to the Festival to get the space and help.
The lottery to get into the Fringe isn't some prize to win, but because there is limited space that many want.
Chances are good that the artists do get a good deal, which is where the Fringe's benevolence kicks in. The Fringe isn't there to make a profit, unlike many venues that the artist might rent out. The Fringe is heavily subsidized (as if any art in this country isn't), from sponsors that pay to get their name out into view, from beer sales (and the associated need to lure in an audience with free shows that will buy that beer, yet even those free shows are paid for in some way), from government funding, from private donations, and from volunteers who give their time (their value is ultimately hard to price, since not only do they give their time freely, but the very short nature of the "employ" likely would require higher per hour salary if they were paid).
So the artist gets a cluster that may work in their favor, the collective mass of the shows bringing in an audience that might be lured to yet another show. They get some general publicity, which won't direct to their show but would otherwise be beyond their means (virtually no independent artist can afford tv or newspaper ads). They get a venue at a decent rate, and a technician that likely comes at a decent rate.
The disadvantages are they have to compete with all the other shows that are happening at the same time. They also have no choice in when they can perform, they have to be ready when the festival takes place.
If there were no Fringes, the artists would be stuck between juried festivals and performance spaces, and putting on their own show. The fact that Fringe Festivals have to reflect a reality does not make them a demon. To attack Fringes because artists have to pay rental and pay for the technician is as absurd as attacking juried festivals because they are juried.
Any festival operating without fees but which lets anyone in is likely a large step down from a Fringe. One can promote that, but it doesn't make it better, and it doesn't make the Fringes worse.