Among other things, it helps reduce the HARSH flash lighting. Softens shadows. Etc. You can achieve the same effect by using a thin white hankie, piece of a translucent milk jug, etc., over your flashif you want to try out the effect (makeshift stuff just doesn't look as "professional"). You do get a bit of a reduction in effective light "power".
However, after years of making my own or bouncing off the ceiling, I finally bit the bullet and bought the $50 LightSphere II to fit my flashes. Yes, it looks like a Tupperware jar on top of the flash ... but the results are absolutely outstanding, indoors or out! In fact, using a single strobe and the LightSphere, you can ***almost*** do away with carrying a 3-flash-with-umbrellas set when doing a wedding. Note, I said "almost". See some sample photos at Gary Fong's site here: http://store.garyfonginc.com/liiido.html