The tether replaces one set of problems with a different set of problems. Some of the new problems had promising solutions, but others were more marginal.
1) Land use. The small props are loud, and the setbacks relative to populated areas are pretty high for tether and crash safety. Solution: offshore. Now you have two problems :)
2) The tether's weight is a factor. Its hard to build in much margin on this component before it gets too heavy to fly. What happens if a gust temporarily reduces tension on the tether? Can it handle a shock load from the kite hits the end again if it comes off its sphere? How many conductors can you run down the tether? IIRC, they were running DC+ and DC-... with no ground. Now, what exactly happens during lightning strike? At the time they believed that they were just barely on the "feasible" side for this component on a feasible-infeasible axis, but it was pretty darned close.
3) The power system was complex. Tether weight biases you strongly towards a medium voltage power system (a few kV pole-to-pole) to cut down on the weight of the conductors. However, the size of the turbine was smaller than any medium voltage application I had ever heard of. Maybe the ground side could be COTS, but the flight side almost certainly couldn't. So now you are also in the business of building bespoke medium-voltage switching power converters and motor/generators. There's nothing fundamentally infeasable about this, its just a bunch of hard work that detracts somewhat from the main mission. A startup would much rather buy this tech, but they were forced to build it instead.
I mention the power system explicitly because that's particularly in my bailiwick, but I think it was really a microcosm of the project as a whole. They were building an airplane for the purpose of energy production. So they had to solve all of the problems that an airplane company has to solve. Also, since electricity is so cheap, you can't afford to pay human operators for all of the generators, so you also must solve many of the problems that an autonomous airplane company has to solve. In salty air to boot.
Overall, there's just a staggering amount of NRE that must be spent chasing a market that is already commoditized. 50 USD/MW-hr is a typical benchmark for wholesale electricity. Meanwhile, solar panels are iterating and getting cheaper and traditional wind turbines are iterating and getting cheaper. Eventually, the bean-counters start to notice.
There's an alternative explanation: Makani (and Wing, and Titan, and the robotics initiative, and other things) were initiated when Larry was still young and excited about the technology itself. We used to morbidly joke that Ruth Porat (hired CFO) was going around the company asking questions like, "Airplanes, Larry? Really?" (taps clipboard, raises eyebrow). Eventually the long years of almost-but-not-quite-success wore them down past the point of endurance, and the projects started dying off when the leadership got bored of them.
IMO, both explanations are likely to be true.