Facebook advertising has been flush with good news lately — the company just announced that it is profitable for the first time and advertisers are increasing their buys across the network. But a new report showing that Facebook ads result in more engagement than display ads on other sites isn’t the only reason people are investing in display ads on the network.

According to Lotame, social media ads result in fewer clicks but more engagement from consumers. But the real killer app for Facebook — for now — is virtual goods.

Social gamer Zynga is making a killing on the social network, and the company is scratching Facebook’s back in return — pouring millions into ads to increase its user base.

Zynga is the top game business on Facebook, pulling in more revenue than the next three top earners: Playfish, RockYou and Causes.

Now that Facebook is in the black, an insider at the company tells Inside Facebook that the company’s “leadership is almost entirely focused on ads for the time being.” And a good hunk of those ads come from Zynga. According to All Facebook:

“They have an extremely tight relationship with Facebook through private
parties (which are buzzed about heavily) and through committing to
large ad buys. In other words they’re helping out each other. As many
developers have noticed, Zynga has managed to own entire sets of ads on
a single page sometimes. In other words, all ‘three’ advertisements on a single Facebook Page
will link to Zynga’s Mafia wars game.”

If social users are engaging with ads more than surfers on other sites, that placement could be very profitable. And it’s a relationship that benefits both companies. Zynga is reportedly making $500,000 a day on Facebook and in turn spending a reported $50 million on Facebook ads annually, according to All Facebook.

That may be a large reason for the good revenue news Facebook announced this month and why the Facebook sales team is “beating the shit out of its numbers,” according to Inside Facebook.

But the longer that companies like Zynga are making a killing on Facebook, the more opportunity the social net has to increase ad sales with other companies. If Facebook can make niche advertising profitable for brands on the site, it has found its main business model. Especially if those niches start to expand outside of the virtual world, and as local and targeted advertisers are learning, they already are.