Facebook crosses the mobile chasm. On to the search chasm!

Facebook has figured out mobile advertising for the social graph, but the big money is in the Search Graph.

Tightrope walker Nik Wallenda traverses the Grand Canyon as Facebook crosses the chasm of credibility in its transition to mobile. Tim Boyles/Getty Images

Facebook has crossed the mobile chasm. At least, that's how fickle Wall Street is viewing the social network's earnings beat: On Wednesday Facebook reported $333 million in quarterly profit versus a $157 million loss in the same quarter last year. Mobile ad revenue surged from 30 percent of overall sales in the first quarter of 2013 to 41 percent in the quarter ending June 30. Facebook stock was up 25 percent in early trading Thursday.

Mark Mahaney, a Facebook watcher with RBC Dominion Securities, said the company has reached an "an inflection point." He, and many of the other financial analysts covering the company, expect the stock to finally surpass its $38 IPO price before the end of the year.

The inflection point is that Facebook proved that it can add a 5 percent solution of somewhat targeted ads to news feeds and substantially grow its mobile revenue.

Facebook's average revenue per user has a significant upswing in the quarter, driven by more targeted local advertising in all of its geographies. Facebook

But CEO Mark Zuckerberg has a far more ambitious goal. He wants to wrap Facebook's monetization engine around the next 5 billion members. In the quarter, Facebook grew its monthly active users by 4 percent, down from the 5.6 percent growth figure in the second quarter of 2012. Growth in North America and Europe has been slowing down, with most new Facebookers coming from Asia and Latin America. It's a very long road to 5 billion and monopolization.

Most of Facebook's user growth has come from emerging economies. Facebook

Given the slowing pace of colonization, Facebook needs to continue increasing its average revenue per user, which requires more targeted, relevant advertising and services. Facebook's targeting algorithms can get smarter, but the reaching the next inflection point requires knowing orders of magnitude more about user behavior --what Zuckerberg calls "understanding the world." Now, Facebook needs to cross the search chasm.

"Understanding the world is helping people share not just day-to-day updates like text messages and photos, but also building up long-term knowledge about the world, what people are interested in, which restaurants are good, which hotels your friend's have stayed out and so on," Zuckerberg said during the second-quarter earnings call. "We should be able to build intelligent services that help you use your network that could answer lots of questions for you."

Zuckerberg is referring to Graph Search , which the company rolled out to U.S. users this month. Graph Search can help discover shared likes and connections, such as movies that your friends like. However, the search function is quite limited. For example, you can't yet search for movies rated by your friends with a specific number of star recommendations or for movies your friends liked that were just released in theaters.

Facebook will add Open Graph data from feeds and apps to Graph Search, allowing for more diverse queries and services that reveal more specific user intent and can command higher monetization levels. In addition, Facebook could add more structured information, such as movies currently in theaters by zip code, collected from third-parties to facilitate smarter answers.

"We're looking at all the different audiences and trying to figure out what is [Graph Search] useful for," said Graph Search product manager Loren Cheng. "I think that what we want to do is connect it with people's natural intent."

Intention is the difference between Google and Facebook. Google processes 100 billion search queries per month, and Facebook processes a billion queries a day, mostly with the intent of finding people. In the second quarter of 2013, Google generated in $14.1 billion in revenue, compared to Facebook's $1.8 billion.

Zuckerberg also talked about building the "knowledge economy, which he described as helping people to create companies and jobs, and which he measures in terms of how many businesses on Facebook are active advertisers. "The way I see our advertising product, we're not just building a strong monetization engine for our company. We are creating tools to enable new growth in jobs and businesses ... a platform to support a larger economic shift in the world based on knowledge and information."

Currently, Facebook has 1 million active business advertisers, double from a year ago. "Nearly 18 million local businesses now have Facebook pages, but we are excited to hit 1 million active advertisers. We know that this is just a small fraction of the local businesses on Facebook, so this remains a large growth opportunity for us," said COO Sheryl Sandberg.

So far Facebook has done a good job in connecting everyone, and could hit the 2 billion milestone in a few years at its current growth rate. Whether Zuckerberg and team can understand the world and build the knowledge economy is far less certain.

 

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