Two reasons:
1. Advertising, so people knew who took the photo
2. Anti-theft measure
#2 is really pointless, as anybody with decent software can remove most watermarks if they REALLY wanted to. It only stops the casual user.
I concur... succinct and true.
In terms of advertising:
For instance, Flickr has gotten me thousands of views of my photography... truly pointless unless people look at the photos and can see who shot them, maybe even opt to go my actual online galleries. On the other side of the coin, I don't use watermarks at all on my online galleries... if somebody has navigated to my website, further advertising is unnecessary.
In terms of theft-prevention:
I also slap watermarks on my Flickr images in part because they are amongst the most likely to show up in a Google Image Search. I don't know if anybody has noticed, but as it happens these days, the ordinary user that needs a photo just plugs a search term into Google and steals the first shot they like. There is no checking to see if it's licensed via Creative Commons, no tracking down the creator to license a copy... they just right-click, download, and unlawfully use it as they please.
As adversus mentioned, being even half-way proficient with graphics software will probably enable thieves to remove most any watermark. But it's my personal belief that the vast majority of image thieves don't know jack about graphics editing and probably couldn't remove a watermark from a photo if their lives depended on it. So, while I agree that watermarks only prevent theft by the casual user, I just want to clarify that the casual user is the most common user and probably the most common potential thief.
That being said, the only theft-prevention measures I take on my online galleries involve 1) disabling the "right-click > save to disk" functionality and 2) showing my photos at no larger than 1024 pixels on a side (or a size somewhere in that ballpark). Somebody could easily do a screen capture on my galleries and get that 1024px version... and that's really the point at which I just have to trust that people who demonstrate a interest in my photography which is more sincere than "hey I found this on google" would prefer to legally obtain my work.
Why bother trying to prevent theft in the first place, though? Cuz I don't want people stealing from me... duh! If it's not a matter of livelihood in my case (my primary income definitely doesn't come from my photography), then there's no doubt that it's a matter of principle. I don't take kindly to people taking without asking... simple as that. Sure, I can't entirely prevent it, but I will certainly take all the steps I can to send potential thieves over to somebody else's work that is entirely unprotected and there for the taking by any brain-dead fool with a PC that knows how to right-click and save. Common thieves are gonna have to put in some work to steal my stuff... I'm certainly am not just going to hand it over to them.
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