This is very contrary to my experience: it was thriving up until the day Google pulled the switch. I knew a number of people who were expecting them not to go through with it because Reader was so important to their daily routine. The catastrophic failure Google made was not recognizing how disproportionately the Reader community were influencers — in particular, tons of journalists used it so they were pushing out an un-QAed Google+ and telling everyone that it was great right after taking away the service they liked. Even if Google+ had been well-designed or implemented that would have been a tough sell. Since it took something like 6 months for them to think about problems like privacy, spam, or notification overload the coverage of Google+ was overwhelmingly negative.

All of the RSS readers I used at the time other than the Reader web app also had the option of fetching full text or loading the feed in a browser frame to avoid the fragment problem. Some of that was simply performance: a busy site publishing full text could generate some massive XML files which take time to transfer and parse.

Also, why is it a problem to show ads in feeds? Annoying ones, sure, but I'd be happy to have ads (or pay for a subscription) if that meant that places could pay journalists.