They succeed because they make everyone happy. Listeners get music for free, of course. Artists get to have their music distributed in high-quality versions with good metadata, album covers, etc. rather than crappy low-fi rips with no guarantee their name is on it. But most of all, artists and the labels build brands. The music sells the artist's live shows (if they have any), and the quality of the music found and distributed by the netlabel builds the reputation of the person behind the netlabel. And netlabels are starting to launch careers--there are a few artists, in particular a guy named Pheek who has become fairly big in the last year or two, who came entirely from netlabel releases.

O'Reilly Radar - Netlabels, Branding, Wet Fish, and The $0 Song