May 2, 2013 · 5 minutes

A few short years ago, Facebook was on track for world domination. The social network was building an open graph that would create and then dominate a new Internet structured around social relationships. Google and others would be sidelined. Mark Zuckerberg was annointed “our new Caesar” (without our consent – typical for dictatorships).

As everyone knows, the Facebook IPO reversed all that. And after the inevitable backlash, it became clear Facebook would end up somewhere between the fearsome juggernaut it once threatened to become and the hapless goat it became in the months after it went public. Its earnings became one of the most closely scrutinized in the Valley, because they yielded the best data on how Facebook would fare in the long run.

After nearly a year as a public company, Facebook is emerging as a successful Internet company. It's not the elaborate joke worth $15 a share, nor is it the once-in-a-generation success valued at $45 a share. It's right in between, trading around $27.50 in the wake of its first-quarter earnings report today. (When Facebook reported its earnings in afterhours trading, Facebook's stock popped 3 percent, then fell 2 percent then, settled near its closing price of $27.43 – all in the space of an hour.)

Facebook is a Goldilocks company – not great, not terrible. It's pretty good – an ordinary, successful Web company. But is pretty good good enough for Facebook? The company was founded less than a decade ago, but already it's showing the signs of a middle-aged tech company – slowing revenue growth and declining profit margins, new areas of business eating into old areas, pleas to investors to be patient as it invests heavily to generate future growth.

There's nothing inherently wrong with this. It happens to Google. And Microsoft. And Amazon, and Netflix, and Yahoo. But all of those companies were formed during or before the dot-com years, the earliest days of the Internet. This is not what you'd expect from a young company with a good share of the industry's top engineering talent, 1.1 billion active users, and an early lead in one of the hottest areas of growth in tech.

Facebook's revenue is growing at a healthy rate: 38 percent this quarter from the same quarter a year earlier. By contrast, Google's revenue is growing 31 percent, and Amazon's is growing 22 percent. But the rate of growth is slowing. Last quarter, Facebook's revenue grew 40 percent, and a year ago the growth rate was 45 percent.

Declining growth is inevitable for companies and not necessarily a warning sign. What's more worrisome is that growth is slowing while margins are also dropping. Facebook's gross margin fell to 72 percent this quarter from 74 percent a year ago, while operating margins fell to 26 percent from 36 percent a year ago.

This is troublesome because it suggests Facebook is spending heavily without seeing a subsequent rise in either revenue or profitability. And the company warned on a conference call that it would continue to invest heavily this year for future growth.

In other words, even as past investments are having a limited effect on increasing revenue and profits, the company is plowing into new unproven business models. Facebook has shown it's serious about being a force that shapes the mobile Web, but so much remains uncertain from a financial standpoint: How will Instagram users react when ads appear? Will Facebook Home resonate with more than core users?

And then then there's mobile. Much was made of Facebook's rapid growth in mobile ads, and rightly so: Mobile ad revenue has gone from zero to 30 percent of total revenue in less than a year. But that growth also raises some unhappier questions: Just how much of mobile growth is coming at the expense of growth on desktop ads?

Non-mobile ads brought in $875 million in revenue last quarter, down 15 percent from the previous quarter and down 7 percent from two quarters ago, when Facebook began breaking out mobile and desktop ad revenue. So while Facebook may be delivering on its promise to monetize its mobile app, it may be doing so at the expense of what has always been its core market: ads on desktops.

When Facebook went public, 82 percent of its revenue came from desktop ads. In less than a year, that number has fallen to 60 percent. And as soon as Facebook introduced mobile ads, its average revenue per user began to flatten, dipping to $2.85 per user in North America last quarter from $2.87 two quarters earlier. Like many newspapers, Facebook may be cannibalizing its older, higher-margin business as it pushes into a new area.

In short, Facebook is doing a decent job making money in a thriving market. But it's showing signs of aging prematurely, and given its early promise it's hard not to look at the company today and feel it's fallen short. It has access to an unprecedented gold mine of personal data, but it still can't offer ads that resonate with many users. And while daily users continue to climb each quarter, Facebook can't shake the image that it's not as necessary as it seemed a few years ago.

After an analyst asked Facebook executives on today's earnings call about the perception that people under 25 “are disengaging from Facebook,” CFO David Ebersman offered this hardly spirited defense:

You asked about people under 25, we continue to have really high penetration rates among that age group, both in the U.S. and globally. And the younger users remain among the most active and engaged users that we have on Facebook. And then in addition, younger users are extremely active users of Instagram as well. So that's great and makes our position even stronger. I think, from our standpoint, the urban legend you referenced, sort of flows more often than not from surveys people have done of younger users that indicate that they're using other social services. And we take this feedback seriously but our sense is that much of the concern stems from the assumption that this is a zero-sum game and that's not how we see it. We think the overall amount of time spent on services that enable you to connect and share is growing and will continue to grow, because these kinds of services are really engaging and good. And it's great for us to be the leader in a market that's expanding rapidly.
This is a case where a little hard data could have dispelled the “urban legend” that Facebook's core audience is drifting away. (The survey referenced showed that, among US teenagers, 33 percent cited Facebook as the most important social network, down from 42- percent several months earlier.) Instead, Ebersman offered a vague counterargument and the company's view that social media isn't a zero-sum game.

Ebersman is right. The attention economy in social media may not be a zero-sum game. But the competition for ad dollars is. Facebook always used to play rough in the online-ad market, so it could win that zero-sum game. To see it accept that it must now share much of the market it created shows how far the company has drifted from its early promise.