Vertical integration is function of size. At scale even the small efficiency improvements can make big differences, Facebook run their own DCs and design some hardware too coz it probably makes sense at their scale.

Vertical integration is a function of size and other variables.

For example, I used to work for a solar power company that would install panels on the roofs of big box stores and then sell the power to the stores below grid prices. This company did not manufacture panels -- they bought them at market rate from various suppliers.

The company got acquired by a major silicon wafer manufacturer. One of the things this wafer company made were solar panels -- boom, vertical integration. What a win, right? Well, as it turned out, after about a year, their competitors were able to bring their panel prices down whereas the acquiring company moved a bit more slowly. Thus the wafer company became an albatross around the solar power company's neck. They had to use the parent company's panels, instead of their more cost-effective competitors, and ended up no longer being competitive in the market.

So vertical integration can and often does make sense, but it comes with a loss of agility, and sometimes being nimble is more important.

While there are no fairy tale solutions . Vertical integration gives lot more control which can give gain competitive advantage if done correctly either by doing it cheaper or adding features your competiton cannot

In your ancedote the buying company seems to be benefit with increased sales for a non competitive product. Ofcourse they are doing at the expense of the eroding target , but they are deriving value not the way you see it perhaps or the best possible one but value nonetheless.