Agreed -- anti-competitive law is pretty clear on the fact that scale and market dominance in one market cannot be leveraged to gain significant market share in another market for this exact reason
The fact that they have market dominance on another market is immaterial here, they didn't need it to keep Google Reader free. Lots of companies have free online services subsidized by their endeavors, without being dominant. You're posting in one of them right now, for example.
It is absolutely material in competitive and antitrust law. It's not an issue of interpretation or opinion here -- it's applying the same principles that got Microsoft in trouble in the 90's.