It is flawed because in a competitive environment, friendships and such should not be a factor, especially fighters. The primary objective of the a match making is to pit you up against people of equal skill. Not pit you up against your friends. People who are playing in a ranked system, want to rank up. You do that by beating people ranked similarly to you. The only "advantage" would be if a stranger and a friend of yours who is also looking for a match are of the exact same rank, it would pick you friend. And while that sounds good from a player perspective, it actually isn't from a competitive. In order to get better, you have to increase your player pool, especially in the lower brackets. If you only play against the same people, you will plateau very quickly. The addition of other people ranked similarly, especially in games requiring mental strategies, will allow you to engage in a more diverse competitive environment. You will learn how to handle more styles and the mistakes you make will be punished in different ways. You will also not develop bad habits based on other people's bad ones (for the most part, which is a problem with online play in general in fighting games*). If you know your friends are bad at blocking certain set ups, you will go to those set ups more often. You will fall into a tendency to use things that are not safe or ideal because they continue to work. If your friends don't get better and stop you, you will have problems against someone who can. You will be, at best, out of practice in other set ups.
For noncompetitive, fun play; I do agree that playing with friends is probably more fun and can lead you to play other games with them. I have met a few guys on certain games, and after talking with them, found out we have similar interests in fighting games. We became friends the old fashioned way: actually talking to each other.
*online play usually (except for maybe at the highest level) is very forgiving when it comes to bad habits (like unsafe jumps and whiffing). You can easily develop bad habits that get exposed in tournament play.