Bitpay and Coinbase are indeed necessary *right now*. We're still quite early: bitcoin is new, price-discovery is rapid and aggressive, and therefore volatility is very high. Yet there's currently no institutionally acceptable way to hedge bitcoin's exchange-rate risk, so most merchants, especially large ones, are going to consider it imprudent to hold non-trivial bitcoin balances.
Patrick Byrne, CEO of Overstock, has said that once US regulated exchanges/futures-markets exist for bitcoin, they'll hold more and just hedge the positions.
That said, it's worth noting that Overstock does currently retain 10% of their bitcoin sales as bitcoin (and a large Malaysian retailer announced the other day that they're holding 100% of bitcoin sales as bitcoin:
http://www.coindesk.com/malaysian-online-retailer-accepts-bitcoin-wont-convert-fiat-currency/ )
I believe Overstock also said that they're going to try and get suppliers to take bitcoin, which will help. But again, both Overstock and the supplier would probably like to hedge the exchange rate risk, so back to waiting for the futures market.
The other side of the loop that really needs to be closed is payroll. The more companies that let employees opt to receive some percentage of pay in bitcoin, the less conversion necessary. I know blockchain.info pays all employees fully in bitcoin, and I believe Coinbase does too (at least partially). Also note that BitPay has a payroll-api product:
https://bitpay.com/bitcoin-payroll-apiAnyways... These things take time. For the moment, bootstrapping this economy requires most btc-accepting merchants to convert to fiat because they're not in the business of speculating on currencies. Eventually, products will come along allowing merchants to easily hedge their risk, and/or bitcoin volatility in general will be far less than today, and we'll see both the supplier and employee loops close to some extent.
