Facebook's Growth Dependent on User Engagement

A year after Facebook's initial public offering, the question is: What's the plan for Facebook's future? What does it need to do to remain the dominant social network and to pull its stock price back above where it priced its IPO.

Rupert Murdoch Tweeted Thursday night a warning "Look out Facebook! Hours spent participating per member dropping seriously. First really bad sign as seen by crappy MySpace years ago.."

Facebook said the rumors that it's losing its cool factor for the younger demographic aren't true. In its most recent earnings call, in a response to a question about some studies showing a shift in behavior, the company called younger users its "most engaged and active." But the company acknowledged it's carefully watching the trend. Competition is rising, so investors are wondering what Facebook will do to hold on to its crucial, and often fickle, younger users.


The social network faces competition from all angles—everything competes for Facebook's users time, and there are a raft of other ways to communicate with friends. Twitter and Tumblr are both growing in popularity, and their open social communication tools are an alternative to Facebook's closed network.

Facebook's making a big push to drive adoption of its messaging tools. It sees their value as a way to lure in new users, especially outside the U.S., where people have easier access to smartphones than desktop computers. But it also sees growing competition from stand-alone messaging apps such as Kik, Groupme, and Whatsapp. But unlike Facebook, some of them have vowed to stay add-free.

(Read More: Beyond the Big Three: The Who's Who at Facebook)

Facebook's Secret Weapon:

Perhaps the most valuable tool in Facebook's arsenal as it battles to keep youngsters hooked is Instagram, which has 100 million monthly users. The benefit and drawback: Instagram has zero ads. That's fueled its appeal, but also puts a huge amount of pressure on how Facebook handles the inevitable ad roll-out. Too many ads or poorly targeted ones could send users to competitors like Cameraplus.

What Facebook Should do now:

To stay on top Facebook needs to be careful about protecting the user experience. The way it handles ads—and not overwhelming users' smartphones with them—is key. It also needs to watch privacy issues—making it easy to update privacy settings, and avoiding the "ick" factor when ads feel so targeted that they indicate just how much Facebook is aware of users' behavior.

(Read More: Facebook Shares One Year On—Time to Reconsider?)

Plus, Facebook needs to innovate or acquire in a few key areas. Mobile users may be driving Facebook's growth, but with its "Home" app off to a slow start, Facebook is surely on the look out for tools and services to keep mobile users logging in and engaged. A new messaging service or mobile payments app could be a good fit. And the fact that Facebook's been interested in acquiring social traffic navigation app WAZE makes sense.

Reports that Yahoo is interested in buying Tumbler, with 117 million monthly users, and a particular pull for the younger demographic, has raised questions about whether Facebook might be drawn into the bidding process as well.

Content, and video in particular, is a key growth area. For Facebook that could take the form of a social newsreader app. Video services have the appeal of the video ads that could be embedded in them; video ads have been growing in value. And unlike Twitter, which has Vine, Facebook has yet to make a targeted video play.

And of course Facebook is always on the look out for technology to make its ads more effective and easier to measure.

(Read More: Facebook Makes Mobile Money, Though Earnings Miss by a Penny)

—By CNBC's Julia Boorstin. Follow her on Twitter: @JBoorstin