Coming from a mixed martial arts
background, there's a lot of crazy shit that you might think isn't applicable in a no holds barred
fight, but are actually good tools you can use given the right situation. The roundhouse kick is one of those tools.
The kickboxing roundhouse kick is what has been assimilated into the sport of mixed martial arts, so that's what I'll be referring to here; swinging the leg like a bat, generating power from a forceful rotation and turning-over of the hips, hitting the head, body, or lead leg.
Kicking in general is going to open you up to a lot of bad situations, it posts you on one leg, it's slow compared to just throwing a punch, and if you miss, your recovery is going to take a while - you're either going to have to swing your leg back, or let the hips follow through and spin the full 360 and hope that the other dude isn't aggressive and shoots in for the takedown or the right hand or what have you.
However, if you watch any UFC match, any Pride Fighting Championships, Bushido, vale tudo, etc. event, and the fight stays standing for any length of time, you are probably going to see someone throw the roundhouse kick.
The advantage of the kick are of course it hits hard - even if the dude protects his head, if you throw a good kick, the other guy's not going to be able to snap back with anything to worry about, he'll be off-balance.
Another sad truth is that even seasoned fighters (I probably don't have to tell you about guys in a random public situation) have bad stand-up habits. People don't keep their hands up, or when they throw a jab and stay inside, they don't snap that hand back to their face, they'll let it drop, and those are the things that kickboxers look for, just those little opportunities, that's all it takes to break somebody's face with shin bone.
Also mentioned frequently is the tactic of mixing up the high and low roundhouse kicks, also known as the muay thai low kick. What you'll see a lot of in kickboxing matches and in mixed martial arts is the kicker will start the fight using low kicks, and as more and more damage is inflicted on that lead leg and the other guy's doing stuff to protect it, dropping his hands, twisting to one side, the kicker will begin to throw the high kick - it's changing the levels, using Pavlov's conditioning, surprising the other guy, and because he's concerned about protecting that lead leg, a lot of the time he'll eat shin bone to the face.
And while the kick is slow and telegraphs a lot - the hip movement, the shifting of the weight, if it's coming hard you can probably see it coming a mile away - good kickboxers can cover it up by throwing it in the middle of a standard boxing combination. What you suspect is going to be a one-two-three, jab-right hand-left hook, actually turns out to be a one-two-kick - you protect your head from the left hook and instead get kicked in the liver. God knows it's happened to me a few times too many. And again this also works with the low kick, tagging it on at the end of a series of punches, damaging the leg, then coming back up high once the fighter begins to protect the leg.
And I'm not saying that the roundhouse kick is the ultimate weapon, I'm just saying that in certain situations, and when it's used a certain way, it's a useful tool, but it shouldn't be the only thing in your arsenal. If you haven't had good training with kicks or you're just not built to do that fancy bullshit, stick with just the vanilla low kick - it's faster, probably more versatile, and can win you fights if you hit the dude's leg enough times with it. Mark Hunt, that iron-chinned motherfucker who's taken bombs from Ray Sefo, Jerome LeBanner, and even Crocop's high kick, has been stopped by LeBanner's low kick.
There are plenty of counters or steps you can take that can stop or protect you from the roundhouse kick. Just keeping your hands high is good, if it hits you, it might hurt and it might knock you around a little bit, but it's not hitting your head or chin so you won't get knocked the fuck out, and it's meant to end combinations, so the other dude's not going to really be able to capitalize on anything. If your lead leg's getting smashed and you know the high kick's coming, well, you're already in plenty of trouble, and all I've been shown is to throw the right hand any time they use the low kick to discourage them from sticking it out there, but you probably want to take the fight to the ground, or start putting pressure on the guy and pushing the pace - get inside, throw punches, look for the knockout, because if your leg's hurting and you keep hanging out on the outside, you're probably going to get knocked out.
Controlling the pace of the fight is generally the best way to protect yourself from the roundhouse kick, but then again, that's the best way to protect yourself from basically anything. If you never give the other guy time to set up for the kick, chain it at the end of a combo, use the low-low-high tactic, you're in good hands. This is easier said than done, just like every goddamn thing in life, because it's assuming you're a better stand-up fighter, you've got better conditioning, and that lucky punches (or kicks) never happen. If this isn't the case, learn jiu jitsu, shoot, get a body lock, and inside leg trip that motherfucker.
Here's the bottom line: throwing a roundhouse kick is kinda risky, and easy to defend against, but it works a lot of the time because nobody's perfect, everybody makes mistakes. Everyone can say, "keep your hands up," but if you've never been in a situation where someone's trying to tear your head off, you don't really know what that means. You don't know that it means when you throw a jab, you've got to snap that shit straight back to your face, it means when you're inside, you've got to be protecting yourself from the hook, the uppercut, and the kick, and it means when you're outside, they still need to be up because the kick can come from outside (it means a lot of other things too, this is just off the top of my head). And you can coach a fighter for months, "don't lean to your left," but when it's go time, stress is up, and they're reacting purely on instinct, that dumb motherfucker is going to lean left, the other guy's probably going to notice it, and if he's any good he can capitalize on it.
Look up a Crocop highlight vid or something, or Buakaw's K-1 World Max debut. Crocop's roundhouse kick took him to the highest ranks of Pride's heavyweight division, and it's probably going to win him the heavyweight division in the UFC, because the UFC's heavyweights fuckin suck. Buakaw is just fucking unbelievable, he's like a 25 year old from Thailand with impeccable form and strength and conditioning, just destroyed former K-1 champion Hiroyuki. Rashad Evans's last fight for UFC's The Ultimate Fighter (or was it SpikeTV's Fight Night Live?) was another good example of the roundhouse kick in action - his opponent had a tendency to lean to one side during the fight, Rashad waited for that opportunity, bang, sent the other guy to sleep.
Between you and me, though, nothing in stand-up fighting is any where near as exciting or useful as some good jiu jitsu.