The official company line is that usage has declined. Google is also a busy company with a lot of projects going on at once. Shutting down Reader lets them refocus the team on something else. One former product manager for Google Reader suggests the Reader team will be sent to work on Google+.
Brian Shih, Former Google Reader Product Manager, recently responded to a thread on Quora asking why Google Reader was being shut down. He says that the common explanation for Google Reader's demise - lack of monetization options - probably didn't play a role in its sunsetting. Instead, it's all on Google+ and the company wanting to move more resources to the social network:
Let's be clear that this has nothing to do with revenue vs operating costs. Reader never made money directly (though you could maybe attribute some of Feedburner and AdSense for Feeds usage to it), and it wasn't the goal of the product.
Reader has been fighting for approval/survival at Google since long before I was a PM for the product. I'm pretty sure Reader was threatened with de-staffing at least three times before it actually happened. It was often for some reason related to social:
2008 - let's pull the team off to build OpenSocial
2009 - let's pull the team off to build Buzz
2010 - let's pull the team off to build Google+
It turns out they decided to kill it anyway in 2010, even though most of the engineers opted against joining G+. Ironically, I think the reason Google always wanted to pull the Reader team off to build these other social products was that the Reader team actually understood social (and tried a lot of experiments over the years that informed the larger social features at the company). Reader's social features also evolved very organically in response to users, instead of being designed top-down like some of Google's other efforts.
He says the real death knell came when the company decided to move Reader's social features to Google+ in an effort to encourage more sharing via its social network. Since then, he assumes that Reader usage has dropped as more people moved to Google+.
So with dwindling usefulness to G+, (likely) dwindling or flattening usage due to being in maintenance, and Google's big drive to focus in the last couple of years, what choice was there but to kill the product?
Shih notes that all of this is purely conjecture as he left Google in 2011. The reasoning behind the shutdown could be as simple as Google says it is - Reader doesn't have many users anymore. Still, it's interesting to see the internal politics regarding Google's products, and how they decide to allocate resources.[h/t: The Next Web]