Except for the part with the Dazzlings being evil, I don't think it was such a bad idea. It seemed like every band would play at the musical showcase, including those who, well, weren't so good, and it would make the concert way longer without really increasing its quality.
Then again, some bands may have choosed to compete only once they were under the Dazzlings' spell.
Personally, I think that at least making the bands pass an audition for the showcase would have been a good idea (and it would be less long than auditions for a battle of the bands, since each band would have to pass it only once). And they could let more bands actually go on stage this way.

The Battle of the Bands give me the idea of the story for what will happened next after that event in my head-canon of Equestria Girls.

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A battle of the bands isn't inherently a bad thing, of course, and if it weren't for the Dazzlings' influence making everyone overly competitive, a battle of the bands probably would have worked out quite nicely.
But at the same time, I don't think that it was the type of thing that they were going for. The purpose of the showcase was just to show off the students' musical talents, and I got an "everyone's a winner" type of vibe from Celestia about the whole thing. But a battle is by its very nature competitive, and there can be only one winner.
And really, I think that a lot of bands joined who wouldn't have otherwise. As a showcase, there wasn't really any reason for anyone to join unless they really enjoyed making music and/or they were good enough to earn some praise for their performance. Sure, there might be some people who would join because they just thought it would be fun or thought that they were better than they are (I'm looking at you, Crusaders), but I think they would be in the minority. But when the Dazzlings turned it into a competition that everyone wanted to win, then everyone had a motivation to join, Including some who I'm sure wouldn't have done so otherwise. At the very least, I wouldn't be surprised if Photo Finish's group, the eco kids, and Snips and Snails weren't planning on paricipating in the showcase. And the Crusaders and Derpy's group could go either way, because who ever knows what either of them will do?