XMPP was meant to enable users from one Internet communication network to be able to talk to a friend or co-worker on another such network. So, for example, an AOL Instant Messenger (AIM) user could talk to his co-worker on Google Talk and vice-versa. It sounds great, so what went wrong?
A Google spokesperson explained, "The openness of [Google] Talk led to bad user experiences like spam attacks, and limited us in terms of supporting the various forms of communication that we're now able to achieve with Hangouts." While Google didn't mention it, in the past, other companies have been reluctant to fully support XMPP because of security, quality of service, and revenue stream concerns about third-party servers and clients.
What no other major player did, and what Google is now abandoning, is XMPP server-to-server federation. The Google representative said "XMPP was designed over a decade ago to provide a way for chat networks to interoperate, known as federation. Google Talk was the only major network to support federation, and after seven years, it’s evident that the rest of the industry is not moving to embrace this open system. If, at some point in the future, the industry shows interest, then we would then be open to discussions about developing an interface that's designed for modern needs."
Thus, Google will still be supporting XMPP client-to-server connections. However, XMPP's main selling point, server-to-server federation, made it possible for individual organizations to self-host their own instant messaging (IM) services while still enabling their users to talk to people outside of their group on other XMPP services. Without this federation functionality, XMPP's universal communication functionality is limited.
Practically speaking, what Google's change means is that Google Hangouts users will still be able to have IM chats with users on XMPP services such as Jabber, the Free Software Foundation, and Openfire servers, and vice-versa. In addition, users of third-party IM clients, such as Pidgin, Trillian, and Microsoft's Outlook.com will also continue to be able to IM with Google Hangout users.
What independent XMPP server users and IM client users won't be able to do is use Google Hangout's additional services such as VoIP, video-conferencing, or have multiple participants in an IM session. If you want those, you'll need to use Google's Hangouts apps or the Google Web-based Hangouts client.
Someday there may be a broadly-deployed universal Internet communications open-standard. Another such set of standards, Session Initiation Protocol (SIP) and SIP for Instant Messaging and Presence Leveraging Extensions (SIMPLE), has also been used to try to bring unity to online communications. Indeed, Cisco and IBM are working in an Internet Engineering Task Force (IETF) standard that will unify SIP and XMPP. Regardless of the technology, without broad industry adoption it will continue be difficult for users of one unified communication service to talk to users of other such services. With Google's move, that day is a little farther off.