Facebook's Death Spiral: It's Inevitable (and Already Starting)

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Facebook demiseSince the birth of the Internet, all of the Web's dominant companies have had one thing in common: Eventually, they all faded into oblivion.

Prodigy and Netscape are now a distant memory; MySpace becomes more irrelevant by the day; and AOL (parent of DailyFinance) and Yahoo! must constantly struggle to keep their footing in a shifting online landscape.

And then there's Facebook. Seemingly invincible Facebook.

Gangbuster Beginnings

Since it started in 2004, the company has been on a tear to dominate the Internet. And that's exactly what it's doing. According to Internet researcher Hitwise, the company accounts for around 25% of page views in the U.S. right now -- that's five times more page views than Google (GOOG), a company most Internet users go to every day.

Facebook seems unstoppable. But the same could have been said of its predecessors.

MySpace started just a year earlier than Facebook and passed Google as the most-visited website in 2006. Today, it has fallen to 138th place and was purchased in a fire sale by a group of investors that includes Justin Timberlake.

Internet companies rise and fall hard, so why should Facebook be any different?

Short answer: It's not. The company already faces several threats to its dominant position. What remains to be seen is how Facebook handles the threats.

The 'Next Facebook' May Already Be Brewing in a Cramped Dorm Room

The biggest threat to Facebook comes from entrepreneurial college students across the country. Remember, Google, Facebook and Microsoft were all started by college students, as were a slew of other Internet companies.

What's going to keep users engaged in Facebook when the next social-networking hotshot comes along? Sure, you have hundreds, maybe thousands of pictures on Facebook's server, but you can just leave those there like you did with MySpace.

Big Fish Make Bigger Targets

When you're small it seems like you can't do anything wrong. Your product is shiny and new, people are eager to try it and get all of their friends to follow along.

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When you become the establishment -- as Facebook has become -- you take heat for every change you make. Any slip-up can turn into the thing that leads to your downfall.

As Facebook heads toward the public markets, it is already skating on thin ice because of privacy issues. This week, the headlines were about employers asking for job applicants' Facebook passwords. Earlier this year, the concern of the moment was Google's privacy statement changes. If Facebook isn't careful, it could overreach privacy boundaries and alienate customers.

At the same time, the company needs to increase revenue, and the way to do that is by using consumer information to target ads to its users. That business model relies on loyal Facebook users openly sharing private information. They have to trust the company to protect that data. Too many ads -- or worse, overly personal ads -- and Facebook will alienate its loyal users and handicap its revenue stream.

Apathy, Defections Have Already Begun

First your uncle asks to be your friend, then your mom, next thing you know Grandma has a Facebook page and Facebook has become "so 2010."

Such is the life cycle of every "cool" thing -- Zubaz, Crocs, and MySpace. They were cool for a while, but when everyone adopted them, they weren't so cool anymore.

Twitter has stolen some of the "shiny new thing" attention from Facebook. So has LinkedIn. Defections start with consumers who have been users for years. Already we're seeing some long-time users start to tune out Facebook just as the whole world is starting to tune in.

Will Facebook's coolness last? That depends. Outside of Google, there aren't a lot of companies that are Internet-based and don't provide physical products that have had staying power.

If Facebook can slow down its aging process and avoid becoming a punch line, like so many Internet companies before it, it might buck the trend. It has a better chance than most of its predecessors, but the risks remain high.

Motley Fool contributor Travis Hoium manages an account that owns shares of Microsoft. The Motley Fool owns shares of Microsoft, Google, LinkedIn, and Yahoo!. Motley Fool newsletter services have recommended buying shares of Google, Yahoo!, Microsoft, and LinkedIn; and creating a bull call spread position in Microsoft.

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Facebook's Death Spiral: It's Inevitable (and Already Starting)

Oct. 28, 2003: Mark Zuckerberg hacked into restricted areas of Harvard University's computer network to create Facemash, a website that pulled the private dormitory ID photos of students, then asked users to compare the pictures of two random students and chose which one was better looking. For the brief period before university administrators shut it down, it proved quite popular.

January 2004: Zuckerberg began to write the basic software to create a universal Harvard social directory, TheFacebook.

Jan. 11, 2004: Zuckerberg registered thefacebook.com domain. Then, on Feb. 4, TheFacebook launched at Harvard University. Mark Zuckerberg, right, and Dustin Moscovitz, co-founder, left; took a semester off in 2004 to further improve on TheFacebook website.

March 2004: Initially restricted to Harvard students, TheFacebook expanded to other colleges, including Stanford University, Dartmouth College, Columbia University and Yale University.

April 13, 2004: Zuckerberg, Dustin Moskovitz, and Eduardo Saverin formed Thefacebook.com LLC, a partnership.

June 2004: TheFacebook moved it's headquarters to Palo Alto, Calif., and received an investment of $500,000 from Peter Thiel.

June 2004: Thefacebook incorporated into a new company, and Sean Parker, a co-founder of Napster, took the job of president for the growing business.

September 2004: Facebook replaced its "User is..." prompt with a "What's on your mind?" question in the newly designed space for posting and sharing status updates called "The Wall." 

September 2004: Harvard students Cameron Winklevoss and Tyler Winklevoss of ConnectU filed a lawsuit against Zuckerberg and other Facebook founders for allegedly stealing their idea for a college social network called HarvardConnection.

July 19, 2005: Then-dominant social networking site MySpace was acquired by News Corp., spurring buzz on the Internet about the possible sale of Facebook to a larger media company.

Aug. 23, 2005: TheFacebook dropped its "The" and became Facebook. Purchase price it paid for the Facebook.com domain name: $200,000.

September 2005: Facebook added networks for high school students.  In December 2005, Facebook reached 6 million users.

2005:  Artist David Choe began painting murals at the headquarters of Facebook in exchange for company stock. Today, the shares he received are worth an estimated $200 million.

2006: A cash flow statement was leaked showing that Facebook had a net loss of $3.63 million for the 2005 fiscal year.

Sept. 26, 2006: Facebook removed its restrictions and allowed anyone 13 and older with a valid email address to join.  A news feed and a mini-feed were introduced, providing easier ways to see what your friends are up to.

May 2007: Facebook Platform launched with 65 developers and more than 85 applications.  Third-party developers quickly followed, building applications to integrate with Facebook. Games such as Farmville and Mafia Wars spread rapidly.

July 25, 2007: A federal judge gave twin brothers Cameron (left) and Tyler Winklevoss, founders of ConnectU, and Divya Narendra until Aug. 8 to flesh out the allegations in their lawsuit against Mark Zuckerberg. Those charges  included fraud, copyright infringement and misappropriation of trade secrets.

December 2007:  Facebook reached 58 million users. With the successful addition of Facebook Platform and video, growth remained strong.  Facebook charted a course toward becoming a general portal like AOL; meanwhile, the choice was made not to aim toward being acquired, as   MySpace.com, YouTube and so many other tech startups were.

June 2008: Facebook settled two lawsuits, ConnectU vs Facebook, Mark Zuckerberg et al. and intellectual property theft, Wayne Chang et al., over The Winklevoss Chang Group's Social Butterfly project. The settlements effectively had Facebook acquire ConnectU for $20 million in cash and Facebook shares valued at $45 million, based on a $15 billion company valuation.

July 2008: The first Facebook iPhone app was released.

August 2008: News broke that some employees reportedly privately sold their shares to venture capital firms at prices that gave the company an implied valuation of between $3.75 billion and $5 billion.

October 2008: Facebook set up its international headquarters in Dublin, Ireland.

February 2009: The "Like" social plug-in was added, allowing users to follow status conversations without having to say anything.  The like button was instantaneously a hit. It's initial purpose has been widely misinterpreted as a positive approval button.

August 2009: Facebook acquired FriendFeed, a real-time news aggregator.

September 2009: Facebook said that its cash flow had turned positive for the first time.

April 2010: Facebook announced the acquisition of photo-sharing service Divvyshot, and introduced Community Pages.

May 31, 2010: Quit Facebook Day was an online event where users vowed that they would quit the social network shortly after widespread criticism was received on the new privacy controls rolled out in mid-May.  Zuckerberg publicly admitted the company had "missed the mark."  An estimated 33,000 users quit the site.

June 2010: Facebook employees sold some shares on SecondMarket at prices giving the company an implied valuation of $11.5 billion

August 2010: Places launched, allowing users to share information about where they are in the real world, so friends can find each other.

Oct. 1, 2010: The Social Network, a film about the start of Facebook, was released to theaters. The film, directed by David Fincher, was met with widespread critical acclaim and won the Golden Globe and Critics Choice Best Picture for the Year. Mark Zuckerberg stated that the film is an inaccurate account of what happened.

November 2010: Facebook added features to its mobile software for Android devices. The number of users reached just short of 608 million, with mobile traffic increasing.  

December 2010:  TIME magazine named Facebook founder and CEO Mark Zuckerberg the 2010 TIME Person of the Year.

January 2011: Equity investors put $500 million into Facebook for 1% of the company, placing its implied value at $50 billion.

February 2011: Facebook added 'Civil Union,' and 'Domestic Partnership' to its Relationship Status options.

February 2011: Facebook application and content aggregator Pixable estimated that Facebook would host 100 billion photos by summer 2011.

June 2011: Facebook partnered with Skype to add video calling as well as a new group chat feature.

September 2011: Heroku joined forces with Facebook for application development using the Facebook Platform.

Sept. 22, 2011: Facebook debuted the new Timeline user interface at the F8 Convention.

October 10, 2011: Facebook launched its iPad app.

December 2011: Membership reached 845 million users.

December 2, 2011: New York Mayor Michael Bloomberg (left) Facebook Chief Operating Officer Sheryl Sandberg (center) and Sen. Charles Schumer (D-N.Y.), react during a news conference on the announcement that New York will be the center of Facebook's new engineering technology initiative.

December 22, 2011: Facebook launched the new profile user interface, Facebook Timeline.

January 24, 2012:  Facebook announced that  "Timeline" would become mandatory for all users.

Feb.  1, 2012:  Facebook filed paperwork to go public, seeking to raise $5 billion on Wall Street in the largest flotation ever by an Internet company.

March 6, 2012:  Facebook launches Messenger for Windows, which gives users of Windows 7  Facebook services without the need for a web browser.

April 9, 2012: Facebook announced that is will acquire the photo-sharing app Instagram for $1 billion USD.

May 18, 2012: Facebook founder, Chairman and CEO Mark Zuckerberg, center, rings the opening bell of the Nasdaq stock market from Facebook headquarters in Menlo Park, Calif. The social media company priced its IPO on Thursday at $38 per share, and beginning Friday regular investors will have a chance to buy shares.

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