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

Facebook demise
Facebook demise

Since 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.

Sponsored Links

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.