To a certain extent it splits the audience, but that's the intention behind federation - to allow communities split across instances to talk to one another.

The main reasons for doing this are:

1. It keeps server costs down. Bigger servers require bigger money, and the people running these servers are relying on donations, they're not billionaires that can just keep expanding forever.

2. It prevents all our eggs being in one basket - if a server goes down, only the community on that server goes. All the other communities can continue, and may even have cached content from the downed server.

3. It prevents the same power imbalance thar Reddit have. If a host starts acting malicious, the community can move to a different instance.