If it allows near free transfer of fiat to anyone, anywhere, anytime, then doesn't that remove one of the primary advantages of bitcoin?
It really depends on whether you see having a currency that can't be devalued as a benefit or whether you would really prefer to trade in fiat. If you'd prefer to trade in fiat but want fast, irreversible transfers across the globe, then Ripple is probably the better choice. Of course, you may have to pay transfer fees and you have to trust someone to hold your fiat for you. That's the cost of using fiat, and maybe when people see that, it will help make the case for Bitcoin to them.
What gorunds would we have to sell merchants on bitcoin?
Well, you don't really have to. If they take fiat on Ripple, you'll be able to pay them with Bitcoins anyway. Seamless Bitcoin gatewaying in both directions is high on our priority list. Of course, if they'd prefer to receive Bitcoins, then Bitcoin (or Bitcoin over Ripple) may be the better choice from them.
This seems to outweigh any benefit brought by ripple
I'm not sure what you mean. I think you're viewing Ripple and Bitcoin through an unreasonably competitive lens. Ripple and Bitcoin are not going to be like Coke and Pepsi any time soon, where every victory for one necessarily comes at the expense of the other. Unless one or the other fails, Ripple and Bitcoin will strengthen each other for a long time to come.
Is your point something like, "Ripple is so much better than Bitcoin that it will destroy Bitcoin". If so, thanks! But it will probably be a very long time before either's success will come at the expense of the other, if ever. Ripple and Bitcoin are both going after a huge group of people who don't know or care much about either and every person either system gets interested in crypto-currencies and decentralized payments will help the other too.