I worked at Google at the time. It was killed for engineering reasons, that boiled down to:
1. Nobody used federation.
2. Except spammers. They used it a lot. Trying to keep federation alive whilst fighting spammers took a lot of effort.
3. It complicated the code a lot. Features that existed in GChat but didn't map well to XMPP were harder to implement.
4. The XMPP protocol sucked on mobile and sucked in web clients, and therefore Google's own clients were not using it any more. New extensions like Jingle were more like entirely separate protocols than small upgrades.
Federated chat protocols are the sort of thing that intuitively sound nice, but networks that implement them inevitably end up being killed off by closed, proprietary competitors that are simply a whole lot better. Email hangs on, kinda, but I passively await the day that the email system is killed off by a closed network. It already happened for personal correspondence (facebook) and I'm sure at some point it'll happen for work correspondence too.
Moxie Marlinspike has written some thoughts on why federated protocols are yesterday's solution here:
https://whispersystems.org/blog/the-ecosystem-is-moving/
Put simply, in a world where clients are all free and the identifier of choice is the phone number, federation doesn't add much value.