One year on from its acquisition by CBS for $280m (£141m), Last.fm is stepping up efforts to generate advertising revenues from its online community of music lovers.

London-based Last.fm has 26m users who discover music on the website through software that analyses listening habits and draws on recommendations from online friends.

For CBS, the acquisition represented an opportunity to build a new stream of advertising revenue for the US radio and television network.

"One of the main reasons Last.fm agreed to be acquired by CBS had everything to do with the fact that we have great relationships with agencies and advertisers," says Quincy Smith, president of CBS Interactive.

Today, Last.fm gets more revenues from selling tracks via affiliates such as Amazon and Apple's iTunes than it does from advertising.

Since February, users have been able to listen 'on demand' to about 5m tracks and albums from all four leading record labels for free, which it says has increased sales though its partners by more than 60 per cent.

Last week, Last.fm began testing a redesign with 150 per cent more advertising inventory, as well as new formats such as video.

Martin Stiksel, Last.fm's co-founder, says the company offers advertisers a young and "highly engaged" audience.

That audience spends longer on each page than on most websites, as they listen to tracks and watch band interviews.

Last.fm can also target users based on their musical tastes.

Advertisers of films such as The Darjeeling People can pick out fans of artists on its soundtrack, while music festival sponsors can target users on the basis of their preference for bands on the line-up. One prototype format allows users to select their own ad soundtrack.

Ad-supported music is as old as radio itself. But tracking the effectiveness of new formats can be a challenge, as technology outpaces measurement capabilities.

Like most websites, Last.fm has to grapple with an increasingly fragmented audience - making monetisation of its content more complex. Just 3 per cent of the site's total traffic comes through its homepage, with a large proportion arriving via 'widgets', small pieces of software embedded into blogs and other social network sites which allow users to share favourite songs, playlists and listening habits.

Last.fm is still figuring out how to harness these distributed users and may soon start inserting audio ads into its freely streamed music in a way typically found in commercial radio stations. However, Last.fm's value to CBS is not only generating advertising revenues.

"We have to make Last.fm a case study to encourage the next generation of entrepreneurs our way," says Mr Smith, who claims to have visited 387 potential acquisition targets in the last year.

Last.fm has retained its start-up feel, which is part of the reason none of its original staff has left since the takeover. Its open-plan offices boast a ball-pool, complete with a geekily elaborate ball-delivery mechanism, and a roof terrace for summer barbeques.

"Like parents, they want you to do well," says Mr Stiksel of his new owners. "But they have hands on our activities very little. CBS knows if it ain't broken don't fix it."