Their FAQ and press release Let me sum up:
Knitpicks, a yarn and yarn-accessory mail-order retailer, is hosting and supporting patterns for independent pattern designers. They are (for the short term) paying an up-front "advance", and passing along every penny they charge for the pattern to the designer. The designer is responsible for designing with Knitpicks yarn, writing and formatting the pattern, and supporting the pattern after it is published. The designer retains all rights (except an edge case dealing with the advance). Knitpicks provides hosting, shopping cart, and professional photography.
What average knitters get out of it:
New patterns, for reasonable prices.
Custom-built kits, essentially, if they choose to buy the Knitpicks yarn. This is especially valuable for knitters who do not want to deal with the agony of substitution math. You can get exactly what you see in the picture.
What Knitpicks gets out of it:
Traffic. Lots of traffic. And when you go to buy one of these patterns, you are presented with an option to buy the yarn listed, in the amounts needed. It's essentially making it very easy to impulse-buy Knitpicks yarn to go with a cool pattern. (how awesome is that Sardine sock?) Combined with their free-shipping-over-$50, I bet this is a huge boon to them.
Designers designing for their particular yarn, without needing to pay people to come up with designs. I believe that many/most yarn companies have staff designers. That's why you get Lion Brand patterns and Berocco patterns and Drops patterns, etc. Those are designs commissioned by the yarn company. You can make them in other yarns, but lots of people don't. Knitpicks has essentially crowdsourced this position.
What designers get out of it:
Hosting. Hosting is nice to have.
Even nicer is someone handling your shopping cart for you.
And they take care of advertising.
And you get the $1.99 each time KnitPicks sells your pattern. Score!
And someone takes professional pictures of your stuff.
And you never lose your intellectual property rights. You can go right ahead and give the same pattern away for free, if you'd like. You're only competing with yourself.
Why the IP model is awesome:
Designers retain control of the design. You can publish your pattern for free. You can charge more money for it. Knitpicks does not own the pattern.
Knitpicks does demand certain standards be met, including standard abbreviations. They even offer a pattern template, which is valuable.
They do not demand exclusivity, which means I can submit my already-created and published-for-free patterns.
You get your sample back! The one you send in for photography. They send you the sample back. How cool is that?
Things I had to read twice to notice:
Not all patterns are accepted. This actually makes me feel better about the quality of the patterns that are up.
If you have taken an advance, and you want to remove your pattern, you must either refund the pro-rated advance or wait until it is paid out.
Things I have noticed publishing my own pattern:
Hosting, advertising, and photography all are unrelated to creating a knitting pattern, but important, if you want anyone to knit it. Even for free stuff.
It is harder than you think to write and design a readable pattern.
In conclusion, ROCK.
LT and I are each going to submit one of our already-created patterns, and I am sort of inspired to order some Knitpicks yarn and create something new. We see the cunning of their plan! (You can also submit a proposed pattern, and they will send you free yarn to knit it, if they think it seems likely).