From my experience, 'Network error' just means it's not working.

Things to try:

1. Run 'python test.py' in the papyon source directory, where you ran setup.py. That should ask you for some info (leave the webcam thing blank) then go off and log in. If that works then you have a problem with telepathy so continue with 2. If it doesn't, then you may have a network problem, missing dependency, wrong password or msn might even be down.

2. Rarely, telepathy-butterfly hangs. Go 'all offline' then at a terminal type:

if you see a telepathy-butterfly there, type:

Add '-9' after killall if it won't die

3. Have a look at the output of 'mc-tool show <uid>' where uid is the relevant account id from 'mc-tool list'. If you don't have '(string) password', or '(string) account' at the bottom then you need to set them with 'mc-tool update' or remove the account and add it again.
I had problems with this when I was trying to integrate with the accountsui for the other thread. Never had this problem with telepathy alone.