By Alexei Oreskovic and Jennifer Saba
SAN FRANCISCO/NEW YORK (Reuters) - Facebook Inc's mobile advertising success offers a ray of hope for Internet companies trying to make money within the confines of the smartphone's small screen.
The social network's 75 percent surge in mobile ad revenue in a span of just three months not only doused skepticism on Wall Street and Madison Avenue about Facebook's business prospects, some say it could serve as a how-to guide for other Web companies navigating a world where the phone and tablet have fast become the screens of choice.
Facebook's "Newsfeed" ads, which inject marketing messages straight into a user's content stream and are tailored for mobile devices, were the stars behind the social network's stunning numbers on Wednesday.
"You're going to see a lot of companies transitioning and trying to emulate this model because it's working so well. That's why last night was a true watershed moment," said Ben Schachter, an analyst at Macquarie Research.
Internet company executives have long been concerned that mobile advertising is inherently less lucrative than traditional desktop PC advertising, due to the smartphone's limited screen size and possible consumer resistance to a flood of ads on their devices.
Companies from Google Inc and Yahoo Inc to upstarts such as Snapchat are searching for the right formula to monetize mobile services. While Google has developed a mobile ad business generating an estimated $10 billion a year in revenue, it remains much smaller and less lucrative than Google's desktop search advertising. Analysts expect Google to generate $60 billion in annual revenue this year.
That wholesale exploration of "native ads" - or marketing messages intended to blend with a users' personal content, rather than stand out as an ad - has met with varying success.
Twitter, which pioneered the concept of the in-stream ad even before Facebook, may also be well-positioned to benefit from mobile ads. "Sponsored" messages now pop up abruptly in the middle of streams of tweets, but analysts say the frequency is much lower on Facebook newsfeeds.
More than half of the privately held company's revenue will come from mobile ads this year, reckons Clark Fredricksen, at industry research firm eMarketer.
Some are just getting into the game. This week, LinkedIn Corp, the network for business professionals, rolled out in-stream ads on mobile and PC versions of its service. Yahoo has experimented with similar types of ads, and acquired blogging hub Tumblr for $1.1 billion in May, in part to jumpstart efforts at developing new formats.
But it's Facebook, which a year ago had zero mobile revenue, that has most aggressively promoted its mobile advertising business to Madison Avenue - with seeming success.
"Compared to other companies, nobody has come right out and said mobile is our sole focus now," said Angela Steele, CEO of Ansible, part of advertising holding company IPG. "Facebook put all their eggs in one basket."
One longstanding question has been how much tolerance consumers have for ads that disrupt their stream of content. Facebook said it has steadily increased the number of ads in the news stream without noticing a drop in user satisfaction.
Facebook Chief Executive Mark Zuckerberg said on Wednesday that, on average, ads now account for 5 percent or one in 20 "stories" in the newsfeed. That ratio could now provide a baseline for calculating success, prompting other Web companies to raise the frequency of ads in their streams.
"It wouldn't surprise me if other companies would look at that and follow suit," said Ansible's Steele.
Hussein Fazal, the CEO of AdParlor, which manages advertising campaigns on Facebook, guesses that the social network must have gradually opened the spigot, gauging user reaction and adjusting the stream all the while.
They seemed to have hit on the right formula, but it's one that differs across platforms, he said.
"The reason Facebook can do it is, the rest of the content that's there is so engaging that you don't mind one out of every 20 ads," he said. "If you have a newsfeed that's not so engaging, and you keep seeing ads, then it doesn't work."
Plus, the more ads in the stream, the less users will click on them, which can dampen ad prices, he added.
Facebook's seeming success on mobile devices contrasts with Google's more gradual improvement in that area. The No. 1 Internet search engine has gradually managed to narrow declines in its overall ad rates from the mobile effect, but last quarter they reversed and went down again, disappointing investors.
Google has avoided news stream ads entirely in its Google+ social network. Instead, its mix of mobile search ads, video ads and innovative formats such as "click-to-call" have delivered what RBC Capital Markets analyst Mark Mahaney estimates is a $10 billion annualized run rate for its mobile business, about four times as much as Facebook.
But mobile has driven down the average cost of Google ads, and some industry watchers consider the transition a long-term threat to the search giant. But other analysts say recent changes to the way it sells ads to marketers, blurring the distinction between the mobile and PC, could help bolster rates.
"The advantage Facebook had is that it's monetization on desktop was pretty immature to begin with," says Mahaney.
Google, by contrast, "had a very mature, sophisticated monetization, and then along comes mobile."
(Reporting By Alexei Oreskovic; Editing by Ken Wills)