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These types of programs are great opportunities for both developers and companies. The developer has a chance to work on something he finds interesting and rewarding as well as learn how to champion new ideas and product. The company gets a happier staff and maybe a new product.
In a cynical sense, one could argue that its just the company's way of trying to get prototypes for new products without having to put product management and marketing behind it or having to acquire a new company. But these programs are like training wheel for entrepreneurial developers: you get to learn how to build a product and see it in the marketplace without any of the usual financial risks.

Agreed -- even taking the cynical view, the developers aren't asked to work extra hours or anything -- they're just given more control over what work they do during part of their time, and encouraged to take initiative. The company might just as easily instruct the developer to work on a prototype for a product idea that a manager had... but the developer would have a lot less invested.

Also, a developer with a great idea for a completely separate project isn't *required* to make it their 20% project. They can always leave and go solo, or (NCA permitting... quite possibly not) work on it at home on their own time... but the fact of the 20% time available (using company time and company resources, all on the company payroll) might make it more enticing to do it there, even though the company will own the IP.

Final bonus: as long as it is still a fairly unusual practice, companies doing it get attention and press (good for both business and hiring).