Earlier this week AdAge reported that Facebook confirmed it is running tests of mid-roll ads in live streams by certain publishing partners. The ads can appear 5 minutes into the live stream and can run for a max of 15 seconds. The ads are drawn from promoted video campaigns already running on Facebook, but advertisers are able to opt out if they’d like.

The test is clearly just a toe in the water for Facebook in inserting ads in live streams, which to date have run ad-free. But, to the extent that the initiative develops further, and possibly evolves to allow pre-roll ads, it would signal an important step forward in Facebook monetizing its live streams and becoming an even bigger player in online video advertising.

Last week, in “Having Conquered Mobile, Facebook Sets Its Sights on Video, But Challenges Loom,” I explained that while Facebook’s massive audience and unparalleled targeting makes it a magnet for video advertisers, its avoidance of pre-roll ads creates challenges in scaling its video opportunity. For all of pre-roll’s challenges, it’s still an incredibly important video ad unit that has been embraced in particular by TV advertisers, who can re-use their spots and extend their TV campaigns.

The challenge is that pre-rolls don’t really fit with Facebook’s News Feed format, as its Founder, Chairman and CEO Mark Zuckerberg justifiably pointed out. However, pre-rolls actually can fit fairly well with live-streams, particularly when they are scheduled in advance or when they’re viewed on-demand (remember, live viewing is just the tip of the iceberg for Facebook Live, a far bigger opportunity is likely on-demand viewing of stored “live” streams subsequently as the videos are shared). Remarkably, even lacking pre-rolls, Facebook is seen by advertisers as being as important as YouTube, long the 800-pound gorilla of the online video industry.

For now though, Facebook isn’t talking about pre-rolls, instead focusing on mid-rolls, which is a fine place to start. Though it’s clearly very early days, advertisers are enthusiastic, though more work is needed in brand safety, measurement and targeting.

With monetization still scarce, Facebook is wisely using some of its massive financial resources to pay publishers and creators to incent them to use Facebook Live. As these publishers discover the value of Facebook Live, they’ll push Facebook to aggressively develop monetization. This should move along the mid-roll experiment, and I believe, inevitably lead to pre-rolls as well.

There are still many steps Facebook needs to take, but the foundation looks like it’s being put in place for Facebook to become a major player in in-stream video ads - pre-roll, mid-roll and post-roll. As this comes together, Facebook’s impact on the ad business is going to grow even further.