OK, Facebook's Q2 report was more or less a bust.
But the earnings call provided insight about the potentially bright future for its mobile ads business.
The key to Facebook (FB) making money on smartphone users going forward is though what it calls Sponsored Stories placed in its mobile News Feeds. It's a way for Facebook to monetize word-of-mouth recommendations from individuals that Facebook users know and trust.
Facebook recently made a video that explains what it is and how it works (and how it's not about friends selling you out, or peddling merchandise to you).
CEO Mark Zuckerberg and COO Sheryl Sandberg talked about it at length on Facebook's earnings conference call.
This is potentially a big deal. Right now, Sponsored Stories is at a $1 millon-a-day run rate. That's not going to move the needle right away. But model that out, and it would be easy to get to $1 billion and more over time.
Right now, about half of that revenue is from PC users, and roughly half from mobile. The mobile portion, in particular, could become a big deal in coming years. Facebook says 4 to 5 billion people globally will have smartphones in the next five years. That's more than twice as many people that have computers today.
"This is an encouraging start in our effort to generate revenue from the mobile use of Facebook," Zuckerberg said. "We know that social ads perform much better than non-social ads so our job over the next few years is to increase the percentage of ads that are social and engaging."
The advantage of Sponsored Stories is that they are associated with higher click-through rates than other mobile ads. Read: Facebook can charge more for them.
Facebook just started doing this in Q2, by the way. It's early days.
That said, it's clear that this will be the linchpin of its mobile ad strategy – provided the company can pull this off without it becoming too invasive.
Here's what the Global Head of Digital at PepsiCo had to say about Facebook's Sponsored Stories in Ad Age:
Mobile monetization will be through Sponsored Stories. That's smart and insightful. No mobile experience can truly support a variety of ad formats. Mobile banners are certainly not the right approach for Facebook. And their own other ad units will significantly degrade the mobile experience. Sponsored stories is the only ad format that doesn't do that. Sure there are privacy questions that remain with the use of sponsored stories but if there's any type of advertisement that I'd be willing to accept amidst limited real estate that's a cell phone, it would be a sponsored story telling me about actions that a friend or a brand has taken. This will scale up in time especially when you throw in location specific sponsored stories (not just on the targeting end but localizing the sponsored stories based on where you are.)