The only reason I can fathom for something like this is that someone genuinely thought that by taking away features and making the experience "more like texting

The only reason I can fathom for something like this is that someone genuinely thought that by taking away features and making the experience "more like texting," they could somehow magically convert texters into hangout-ers. And that perhaps by lying to users and telling them that all their friends are "online" even when they clearly aren't, people will be more likely to chat with them and "grow" the service. Nevermind that you need another person to actually be there before you can have a conversation. There must have been at least a fraction of the hangouts development team that thought this was a boneheaded idea. And the millions of complaints that they got when they released? Those didn't stop because the experience got better, they stopped because it was clear that nothing was going to change. This screams "management decision" to me.