Facebook's biggest problemAugust 1, 2012: 5:00 AM ET
It's not its stock price. Or the difficulty of making its ads business a success. It's something much more, well, fickle.
By Don Reisinger, contributor
FORTUNE -- Facebook has had a rough debut as a public company. Its IPO is now commonly referred to as "botched" thanks to a string of embarrassing problems. Its share price sagged well below $38 after its first day on the market. Then came Facebook's inaugural earnings report last week. The company hit Wall Street's projections, but shares dropped more than 14% the next day to an all time low. In a matter of months Facebook's challenges have piled up dramatically.
But what if Facebook's (FB) biggest challenge isn't financial at all? What if Facebook's biggest problem is actually its users?
At last official count, Facebook had 901 million active users, and was slowly but surely marching towards 1 billion. Although the company will undoubtedly tout that important milestone, lurking in the shadows will be one major issue all social networks have had to contend with: fickle users.
Remember Friendster? It died because users weren't kept engaged and felt that there were better options out there. MySpace, at one time, was viewed as impervious to the social network curse. But after Facebook came along and people realized that looking at MySpace's unsightly profile pages was too much to bear, they left in droves. Google (GOOG) tried its luck in the social space with Buzz, only to watch it fail. The Web is littered with the remains of social services that met a similar fate.
What those companies all learned is that social network users can be extremely fickle. They might love the service one minute and run away another. Less popular sites like Buzz watched that erosion occur nearly immediately. Others like MySpace took longer. But in every case, users left.
Facebook is so aware of the issue that it made it a top risk factor in its S-1 Registration Statement filed with the Securities and Exchange Commission earlier this year. "A number of other social networking companies that achieved early popularity have since seen their active user bases or levels of engagement decline, in some cases precipitously," the company wrote. "There is no guarantee that we will not experience a similar erosion of our active user base or engagement levels."
To its credit, Facebook has grown its user base over the last several years, prompting some to wonder if it will be the first social network to overcome the curse. But let's not also forget that Facebook is still very much a novelty to users outside the U.S. In the States, the company's user growth rate stood at just 16% at the end of 2011. In Brazil, its user base grew by 268%. When the company's service starts losing its luster in those countries, the real work will begin.
Historically, that "real work" causes companies to crumble. As Brian Blau, a Gartner analyst, told The New York Times last month, the social space is "a hit-driven industry." A few missteps or lack of innovation, and the party ends.
Other companies in the online world don't have to deal with that. Google, for instance, knows that as long as it can deliver relevant search results, it'll be fine. Overcoming Google's search algorithm would take a significant amount of time and money that most startups don't have. (Ask Microsoft (MSFT) about that.)
In the social space, things are much different. The barriers to entry in the social market still aren't high, and with the right idea and some proper press, it might be possible to be the next big thing. Pinterest is perhaps the latest example of that. The site has taken off in the last several months, and is now in the discussion of social services that actually make a difference on the Web. What's stopping a Facebook killer from doing the same?
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The issue for Facebook and all other social networks is that they have yet to land in the rarified position of "necessary." Google has become a necessary resource for finding Web sites. Facebook is just a place to hang out and communicate with friends and family. And despite Facebook's best efforts to deliver games, applications, and extend its reach beyond its own domain, it hasn't done anything yet that would totally safeguard it from possible obsolescence.
The cash from its IPO will help keep it going. But at the end of the day, the very fabric of what makes Facebook special could still come into question.