XMPP just wasn't a very good fit for the problem we needed it to solve. It is a verbose, XML-based protocol (reflecting the time in which it was conceived), and it's a mess of extensions (possibly the designers getting carried away with the possibilities of XML) instead of focusing on solving a single core problem well -- this works against the ideal of federation: what happens when you send a message taking advantage of some extension to a user that doesn't support it, or to a user that does, but through an intermediate that doesn't?

Also, it doesn't tackle spam. The concept that anyone can email anyone would probably have killed email, had it not been largely (if by no means completely) solved -- ironically, this was achieved by all but doing away with federation (email now being a oligopoly of Google, Microsoft and a few more, more or less dictating who gets to send email to whom). Finally, what I suspect was the final nail in the coffin, XMPP didn't play well with mobile (not to worry, an extension, XEP-0286, currently in state "experimental" first published in 2010 is fixing that).

EDIT: I should clarify: XMPP works quite well for private (non-federated) IM-setups. I offer this as an explanation of why XMPP isn't the interoperable email of IM across the Internet, and we instead see Facebook/WhatsApp/Slack/million other incompatible things dominating the space.