It does effectively prohibit you from competing with someone else who compiles there code and puts up a download link for free. The “but you can still charge money for it” aspect has always fallen flat, especially since most people won’t pay for disks containing something they could download online these days.
You could presumably make a derivative game using the engine, and sell the game's assets, while complying with the licensing terms on the engine code.
I don't know any examples of this happening, but we've seen the engine/assets distinction before when DOOM and Quake were opened. Their source code was released as Free and Open Source software, but the game assets remain payware to this day.
