I'm not really sure where you get the idea that Austria-Hungary was a failed state; could you elaborate for us?

What does 'failed state' mean? Austria-Hungary successfully held together its multicultural domain for centuries. The Austrians singlehandedly produced the most (in)famous and prestigious dynasty in history. In the 16th, 17th, and even 18th centuries the Austrians were a force to be reckoned with. Although a monarchy/diarchy with limited representation for minorities, the Austrian rule on its Slavic subjects was relatively light compared to Russia's oppressive tendencies or Germany's attempts at wiping out minorities by purchasing their land and 'colonizing' it with ethnic Germans.

I don't think it's prudent to call any nation a 'failed state' except one such as the USCA which survived for such a short amount of time on such a dysfunctional government. Nazi Germany was one of the most horrifying regimes in history to the point where most people today would call it objectively evil, but its military and economic might in 1939 were absolutely inconceivable considering the state of the nation 20 years before and the Nazi Party successfully revived both German nationalism and German industry. Is that a failed state? The debate is still open.

There is a difference between a failed state and a state that failed/fell apart.

A failed state is one where the government cannot or doesnt want to provide basic needs for its citizens. This is usually accompanied with some sort of conflict within the country between political groups. Somalia is usually taken as an example of a failed state and the case could be made for Libya now as well.

Austria-Hungary did not fill this criteria. It did have significant issues with the representation of minorities in the government but it still functioned. It was the treaty of Versailles after WWI that broke the Empire up. Much the same as the Ottoman Empire which had a legitimate and functioning government before the war but was broken up after it.

To put it very very very very veeerrryyyyy simply it was because of the failure of the House of Habsburg in trusting the Hungarians and not reigning back in control. Though I will elaborate because that's an inane answer without some background. I'll mostly give you links and books but overall I would recommend "A Mad Catastrophe" by Geoffrey Wa Ro for more information about this. In fact aside from by links everything I say will be drawn from this book.

The Habsburgs were the ruling dynasty of the Austrian Empire and later the Austria-Hungary Empire. In fact they actually occupied the throne of the Holy Roman Empire from 1438 until 1760, though the last Emperor of the Holy Roman Empire was Francis the Second a member of the House Habsburg-Lorraine so the Habsurgs really were present right up until the end. So this House was pretty well known and certainly had a great reputation because of past achievements ruling an empire on which the sun never set.

Since the Habsburgs had been in a position of such power for so long I'm sure you can imagine that they weren't at all keen on having anyone break away from whatever empire they had if they could help it. Poles going to Poland, Hungarians to Hungary, or Czechs to Czechoslovakia would have been unacceptable to the Habsburgs. To them, these peoples were part of their empire and there was no way in hell they would be allowed to leave. The Congress of Vienna in 1815 reinforced this mentality and gave them legal legitimacy. Well as much as an Emperor would need anyways.

Now what's always stuck with me as the start of the end for the Austrian-Hungarian empire was the loss of Venice to Italy, and of German states to Prussia by the earlier Austrian Empire. By losing an important and exotic trade port the Austrians were shown to be weak, and when most of the German states were lost to the Prussians the Habsburgs were left to rule over mainly Slavs, Romanians, and Hungarians. Franz Grillparzer famously said "I was born a German, but am I still one?". This quote really shows how there was a loss of Austrian/German identity in the wake of these defeats and many started to question the Austrian Ideal. If Austria was no longer mainly German then surely the saucepan of nations that Austria was had burned through.

If you want a date then I would argue that 1866 was really an important turning point, the start of the long and slow end of the Austrian-Hungarian empire. The earlier showings of weakness emboldened the Hungarians more than most and then ended up making a sort of Faustian bargain with the Habsburgs. If the Habsburg dynasty recognized the Hungarians in a way they saw as proper, then they would stop rebelling (which they had done in 1848) along with keeping others from rebelling and put their combined resources towards the empire. This deal included basically greater importance to the formally neglected Slavs, Romanians, and Hungarians. Emperor Franz Joseph wasn't a fool, he saw this as a quick solution that would solidify his control. As such it was a deal too good to refuse, so he accepted it. Thus the Austrian-Hungarian empire was born (up until this it was just the Austrian Empire).

It is important to mention that at the time Emperor Franz Joseph was married to Elizabeth, a Hungarian sympathizer, who was about as keen on being rid of Franz as the Hungarians were. She later went on to become the Queen of Hungary until she was assassinated.

Now this may not seem to make complete sense right now. Earlier I said the Habsburgs weren't eager for breakaways and I just told you that they conceded to demands. Well this was really because of both Elizabeth's influence and that of Count Friedrich von Beust who also really wanted a quick solution to the Hungarian problem. He believed that if this was solved quickly other problems wouldn't arise. Franz really believed that by creating in essence two joined states, he would solve the issue of people wanting to rebel against authority.

Instead of trying to apply German authority to people who really weren't Germans, now Transleithania would take that role. Though instead of taking a more considerate role the Hungarians tried to establish their dominant culture, the Mayars, to all of the lands they now had control over. The Hungarians were extremely ethically arrogant and tried to make their culture the only one to be accepted in the land they had control over.

That went about as well as you would expect it to. The Hungarians started causing problems where none had really existed before. People who once had been upset were now pissed off at the Hungarians, and the Austrians by extension.

In the end Franz Joseph was the only one really holding the Empire together. No one was in it because of the Austrians or the Hungarians, they were unified by a long lasting ruler who was much like Queen Elizabeth is today. People had lived their entire lives under him as had their parents. Overall he was accepted, but in the end no one could take his place.

During WW1 the Austrian-Hungarian Empire performed horribly and people saw the writing on the wall. When they finally lost, there was no legitimacy left in Vienna. WW1 sealed the fate of Austria-Hungary and all the formerly unhappy members were finally allowed to have self-determination.