Wave has not seen the user adoption we would have liked.
Did Google believe that this was going to succeed as a consumer product, à la Facebook?
Wave, as it exists today, is a great tool for corporate communications. With the right interfaces, integration, and extensions it could definitely displace Exchange and Lotus Notes. Eventually, as a protocol, it had the potential to transcend email.
Maybe Google just hoped Wave would appeal to a different market than it really does.
PS #1: I’m sure that corporate uptake of Wave in its current form was limited as well because of the absence of a reasonable client/server that you could run on your own network.
PS #2: Hopefully there are enough of us who like the protocol that, over a number of years, we can build Apache Foundation-quality F/OSS implementations of the needed components.
PS #3: It would be truly ironic if, say in 10 years time, Google finally integrated the Wave Protocol with Gmail because there had been enough private (but federated) uptake as an email replacement.