@CrazyDuck of course moving to a proprietary protocol doesn't mean that federation must die. Indeed we kept federation alive for users for a while by bridging gTalk (legacy, still supporting federation) and Hangouts (proprietary). It was the dream of at least a few (myself included) to open up the Hangouts API and/or build federation on top of it, but it was not prioritized -- I take part of the responsibility for that, even if I was just an individual contributor: I could have done it as a 20%.
XMPP was, back then, considered unfit for the transition to mobile as it was a very 'chatty' protocol and that kills battery on mobile devices. I've heard this has been solved/worked around since? But I haven't looked into how this was achieved, if at all, and whether we could have taken that route instead back then.
Developers in the chat space in G had decided to implement their own protocol for Hangouts, the "next generation" chat app. The consensus seemed to be that going with an in-house protocol would provide enough extra freedom to allow G to implement and ship features faster (whereas innovation on top of XMPP was deemed relatively hard).
@CrazyDuck Yes, I believe so :) Of course this is just how I remember it, it reflects my opinions and not of my employer's, etc.
From my rough memory, around the time this happened in 2013 the following was true:
Federation was considered to be already languishing due to relatively little usage aside from big instances like AOL (who were going down in any case). Actual people running their own individual/community instances were relatively few, and a significant fraction were spammers :(