CBS sure has been walking the walk of a savvy digital media company, with the launch of CBS Interactive Audience Network, the acquisition of WallStrip, and now the acquisition of Last.fm, the popular social music site (maybe this is why Last.fm didn’t have time to launch its application on Facebook Platform).

The CBS brand is associated with broadcast TV, but CBS also happens to own the largest radio broadcast group, which is why the Last.fm acquisition is a no-brainer. What is a conundrum is how Last.fm can help CBS with its legacy radio business — the old programmed-by-someone-else radio station seems positively archaic in the age of iTunes and social music recommendations.

At one level, CBS is taking a similar tact as TV and newspaper companies in developing online assets to catch the flow of ad dollars out of their legacy media. Online advertising is set to eclipse radio advertising by 2008:

The radio industry won’t want to hear this. Advertising dollars are shifting online faster than analysts anticipated. In fact, advertisers will soon spend as much money on the Internet as they do on the airwaves, according to a newly released eMarketer study. On Dec. 6, the New York research firm increased its estimate for 2006 online advertising spending by $500 million, to $16.4 billion.

The new estimate means online advertising will pull in about 5.8% of the more than $281 billion advertisers are expected to spend this year. That’s less than radio’s 6.9%, according to Universal McCann (IPG), which tracks the radio industry. However, radio’s share is declining while online share is growing, says David Hallerman, a senior analyst at eMarketer.

By 2007, online advertising will bring in 6.8% of the total and, by 2008, it will bring in 8.1%—putting it well over radio. By some estimates, online ad spending will overtake radio even sooner.

Indeed, CBS’ radio business is experiencing a newspaper-like decline:

CBS Corp. posted a 6% decline in first-quarter profit Thursday, hurt by weakness in its radio business, costs related to the sale of some radio stations, and a decline in television licensing revenue. CBS Corp. posted a 6% decline in first-quarter profit Thursday, hurt by weakness in its radio business, costs related to the sale of some radio stations, and a decline in television licensing revenue.

Radio revenue fell 9% to $397.5 million, reflecting the impact of the previously announced radio-station sales in 10 markets as well as advertising weakness in the radio market. The company has completed the sales of the stations in five markets, four of which closed during the first quarter.

There’s a good chance CBS will be successful in using their radio advertiser sales channels to pump up Last.fm ad revenue — although it was striking that none of the coverage I read mentioned Last.fm’s revenues or profitability.

Still, the challenge for CBS is to use Last.fm and their other digital channels to compensate for the decline in the traditional radio business, i.e. keeping the Advertising Trend Ratio from sinking too low.

Scott Karp

Scott Karp is the Editor of Publishing 2.0, a blog about the convergence of media and technology. This piece was originally published on Publishing 2.0 and is posted on DMW with the author's permission.