Pandora recently had its first profitable quarter and is capitalizing on the ubiquity of smart phones to boost its business. A recent Wall Street Journal report identified it as one of the 50 most promising start-ups in the U.S.

Pandora’s founder Tim Westergren spoke with Digits about privacy, advertising and the rise of mobile computing. His responses are summarized below.

Did the controversy around Facebook’s privacy changes hit Pandora at all?

Yes, there were some users who were really upset….They would say things like, “How dare you. I didn’t give you permission to do this.”

We thought a lot about that when working with Facebook. Even if it’s public information [already, through Facebook], it’s something that is important to people. But we found that as soon as you start talking with people, the amount of tension goes down. It’s really very limited information–just artists [you're a fan of] and a thumbnail picture.

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If you are Apple (AAPL), you sound the trumpets and assemble the techie press at your Cupertino HQ as soon as possible to preview the new operating system you hope will bring even more powerful magic to your latest creation.

As soon as possible was this morning, and AllThingsD‘s Drake Martinet was there to liveblog the event, which announced, among other things, iPad sales of more than 450,000, a new app-based mobile advertising platform, and long-awaited multitasking functionality for the iPhone operating system. The liveblog is below.

9:11 am: We’ve arrived at Apple’s Town Hall at Cupertino HQ. The electricity John Paczkowski described in his liveblog from the iPad event is missing today.

9:57 am: Just walked in. Room is pretty full. Empty stage, with the standard Apple setup: Apple logo backdrop for the slideshow. Music a la an iPod commercial playing in the auditorium.

10:00 am: Voice on the loudspeakers: “Please turn your electronic devices to silent, we are about to begin.”

10:03 am: Steve Jobs takes the stage and gets down to it. “The next generation of the most advanced mobile operating system in the world.”

10:04 am: Jobs opens with a quote from Walt Mossberg’s review. Says he will get to OS 4, but first, shares some iPad numbers. As of today, he says, Apple has sold 450,000 iPads, 300,000 on the first day. Over 600,000 iBooks downloaded as of today. And I Pad apps? Jobs says that 3.5 million have been downloaded so far.

10:06 am: Jobs says, “When you create something, you really have butterflies when you create things and put them out into the world. We are feeling really good about this.”

He then moves on to the App Store. Users have downloaded 4.5 billion apps as of today. Jobs is now showcasing some screenshots of apps.

10:09 am: Jobs is running through media apps.
Now, he’s getting to the iPhone.

10:10 am: Says Apple has just won its third J.D. Power award for the iphone.

“What is the real measure of usage? iPhone has a 64 percent browser share; everyone else together is half of the iPhone,” says Jobs.

85 million iPhones and iPod touches sold to date.

10:12 am: Now the subject is iPhone OS 4.

Developers can now access the calender, photo library, SMS, full map overlays. In total, they will have access to 1500 APIs. There are over 100 new user features.

10:13 am: Users will be able to change home screen wallpaper, use a spell checker, tap to focus video, create playlists.

10:14 am: Jobs says there will be multitasking.

“We weren’t the first to this party, but we will be the best,” he says, with a nod to Google’s (GOOG) Android.

10:15 am: Jobs demos multitasking. No exposed interface. The active window lifts vertically and a slider of all the apps running appears.

10:17 am: Jobs shows that multitasking takes you back to the exact place in the app where you were when you left, including games.

“That, is our multitasking UI. We’ve been using it a lot and it really changes the way you use the iPhone.”

10:19 am: Jobs leaves and Scott Forstall, Senior VP of Software, takes the stage.

He’s here to talk about the nitty-gritty.

Seven mutlitasking services will be available to developers.

First: Background audio.

10:21 am: Forstall introduces Tim Westergren, founder of Pandora, who is talking about how his streaming radio service will make use of background audio.

Basically, users will now be able to use Pandora or other background audio apps just as they can use the iPod function.

He showcases how users will be able to buy songs from iTunes while Pandora is still playing the song.

10:24 am: Forstall retakes the stage.

“Next service is VoIP,” he says.

“Now, when you’re on the iPhone, you can run Skype in the background.”

10:26 am: David Ponsford of Skype comes onstage.

Skype now can run in the background and receive calls when you are using other apps.

He switches to Yelp while still in Skype call.

10:28 am: Forstall back now; he says the next major change is background location data.

He uses TomTom as an example. TomTom can be getting location data while you are listening music.

“There’s another class of application that wants to use your location all the time, but isn’t used while you are plugged in.”

The new OS will use less accurate cell towers (which uses less power) when doing background location features in social networking apps.

There will be a new icon on the taskbar showing that there are background apps currently using their locations.

10:32 am: Next feature up: Push notifications.

Now there will be “local notifications.” These will come from the apps themselves, rather than from outside servers.

10:33 am: Now talking about task completion.

Forstall says task completion will allow apps to complete tasks, like photo uploads, in the background.

He finishes with “fast app switching.”

“The app moves into a quiescent state in the background and uses no CPU power.”

10:34 am: Jobs retakes the stage to talk about the next major push.

Says there will be App folders.

10:35 am: “We came up with a really beautiful implementation of folders.”

The process of creating folders seems pretty easy. Just drag apps on top of each other and a folder is created.

Folders can then be dragged around like apps.

10:37 am: Jobs now shows us what the wallpaper selection function looks like. Feels like a mix of iPad and OS X.

His wallpaper now matches his pants.

Now, with folders, uses could store over 5,000 apps on their phones.

10:39 am: Jobs moves on to the next new feature, the unified inbox.

Multiple accounts feeding to one mail inbox.

“We’ve also added the ability to organize by thread, so you can follow conversations much easier.”

“And, open attachments. Now you can download an attachment and open it with an app from the App Store.”

10:41 am: Number four is iBooks. Jobs says Apple is adding iBooks to the iPhone, just like the iPad.

“Its a delightful e-book reader, and you can buy the books once and read them anywhere.”

They will wirelessly synch your current page between devices.

Also, free Winnie the Pooh, just as on the iPad.

10:43 am: Forstall retakes the stage to talk about enterprise.

10:43 am: The new OS allows encryption of email and data inside apps.

OS 4 will allow for mobile device management.

Also big for enterprise: Wireless app distribution. “A company can wirelessly distribute apps from its own servers to iPhones anywhere in the world.

Also adding SSL VPN from both Cisco (CSCO) and Juniper Networks (JNPR).

10:45 am: Now talking about something called, “Game Center.” This is the gaming push analysts were predicting.

OS 4 will have a social gaming portal that allows friends to invite you to play games, or will match make you with opponents.

10:47 am: Jobs retakes the stage. “It’s called iAd.”

10:47 am: “There are lots of apps in the App Store for free.”

“Developers are starting to put ads into apps, but we think most of these really suck.”

Jobs says, “On desktops, search is where its at. That hasn’t happened on mobile. On mobile, apps are where it’s at.”

10:49 am: “This is a pretty serious opportunity, says Jobs.

He says this could open over one billion impressions per day.

“What we want to do with iAds, we want to deliver interactivity and emotion.”

The ads keep you in your app, versus getting “yanked out of your app” like before.

“Because iAd is in the OS itself, we have figured out how to deliver that ad.”

Apple will sell and distribute the ads.

Apple will give developers 60 percent of iAd revenue.

10:53 am: Jobs demos ads, starts with a “Toy Story 3″ ad. Says he’s seen the movie, which comes out in June. Crowd laughs.

He adds that, “it’s all done in HTML5, by the way.” More laughter at his point because the audience is well aware that Jobs is not a fan of Adobe’s (ADBE) Flash.

10:55 am: The ad Jobs is showing is really more like a mini app, with streaming video, interactivity, a game, posters, background wallpapers and ability to buy app right from the iAd.

“Users like free stuff.”

“Have you ever seen an ad like this? Anything even close?”

10:57 am: Next up, Jobs shows an ad for Nike, reiterating that these ads were created by Apple “just because we really like these brands.”

He showcases how iAds have access to location and the accelerometer. No word on whether that location data the iAd gets is user-selectable.

11:00 am: “iAd is built into the OS, and the developer will get the majority of the revenue.”

Jobs goes into review mode.

11:01 am: A developer preview will be released today.

Jobs says Apple will release the new OS in summer.

OS 4 will be for 3GS and third-gen iPod touch.

Older devices will get some upgrades, but hardware won’t allow all features like multitasking.

OS 4 wont make it to the iPad till the fall.

11:04 am: Jobs thanks everyone, and leaves the stage.
Lights up, music back on, press starts milling.

11:06 am: Takeaways:

There are obvious concerns about what multitasking will do to battery life, though Jobs emphasized that Apple has figured out a way to offer multitasking without using too much more battery.

Job’s didn’t get into specifics on how.

Forstall emphasized that implementing the new features was easy for developers, saying things like, “they added this [feature] in a single afternoon.”

11:09 am: Now Jobs, Forstall and Phil Schiller take the stage for a Q&A.

There’s a question about multitasking using more AT&T (T) data. Jobs says that it won’t be a big deal, adding that multitasking doesn’t up the amount of use.

He emphasizes that video is the big data draw, and you don’t use more than one video at a time.

11:11 am: Question about whether there will be an approval process for iAds as there is for the App Store?

Jobs pauses, “I’m not sure its going to be any more than a light touch.”

11:13 am: Question about development of iAds.
Job: “No development environment for iAds, just HTML5.”

11:14 am: Jobs says, “So far the ads haven’t been rich enough to warrant a world class ad agency. For the first time, they can bring their storytelling skills. I think this can be a whole new avenue for the advertising industry, because for the first time you can take advantage of the skills of an add agency in the digital world.”

11:16 am: Schiller has yet to take a question.

11:17 am: Question about widgets and glance-able information. Jobs says, “Anything’s possible.”

11:18 am: Of OS 4′s way to switch apps, called “fast-app switching,” Jobs says, “Our competitors are tripping all over themselves to copy it.”

11:20 am: Jobs on iAd: “iPhone customers are among the most desirable demographics in all of advertising.

Schiller gets a word in edgewise: “On the phone, you have apps that help you do things. That becomes the customer’s way into information. Ads attached to those are potentially more interesting than ads just attached to search. “

Jobs: “This is the first time in history that this has ever existed. We have all these apps and a friction-free way to deliver them right to the phone. This has never existed before on PCs, still doesn’t.”

Jobs: “We tried to buy a company named AdMob, but Google came in and snatched them from us. So we bought Quattro, and they are teaching us we are making ads that are different than anything I’ve ever seen.”

11:24 am: Jobs: “This is not a get-rich-quick scheme for Apple. This is to help our developers survive.”

11:29 am: Question about running unsigned apps. Jobs shuts it down saying that there is a porn app store for Android, and Apple doesn’t want to go there.

11:30 am: Jobs brings up Walt Mossberg again, saying how impressed he is with how fast people are “getting it” with the iPad.

Schiller reiterates that the speed of adoption of the iPad, especially with the developers, has been incredible.

11:32 am: Jobs, continuing on the iPad: “If our competitors ever release a device like the iPad, they will be hoping for 3,500 apps in a year. We have that in the first week.”

11:34 am: Jobs, on the App Store: “I’m now seeing an infrastructure being developed through other mediums (blogs, etc.) that help with app discoverability.” This is in response to a question about the app store getting crowded and dense.

11:36 am: This question comes up: “How do you close an app?”

11:39 am: Jobs: “on the iPad, if you saw a stylus, they blew it. On this, if you see a task manager, they blew it.”

He doesn’t really answer, saying you never really have to close an app. Doesn’t elaborate.

11:41 am: Packing up, Q&A over.

More iPad Coverage »

The numbers illustrate Pandora’s challenge to regular broadcast radio’s online programming. Some 22 million people listen to regular radio stations’ streams each week, compared with 15 million for Internet-only stations such as Pandora, according to Edison Research Inc. and Arbitron Inc.

CC Media Holdings Inc.’s Clear Channel Radio (CCO) says it has about 8 million listeners who stream its programming each month.

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Both messages are a result of long and tortured negotiations with record labels that have finally come to a close with a deal Pandora says it can live with, though it’s different than the one founder Tim Westergren said the site had nailed down in November. The flip side is that the service will now require users who listen to the service for 40 hours a month to pay 99 cents if they want to hear any more tunes that month.

And the big picture is that Pandora, which has been warning of its doom if it was required to pay steeper royalty rates, can switch gears and brag about its growth. Westergren tells me the service is motoring at a great clip–he says it is on track to generate $40 million in revenue this year, almost all of it from advertising, up from $19 million in 2008–and it can now accelerate.

“I think that this is going to have a really huge impact,” he says. “We’ve been talking about going out of business for the last two years, and that’s not good for growth.”

The new arrangement might also convince investors to cut the service a big check. Earlier this year, multiple sources told me Pandora was looking to raise a very big round, perhaps in the $40 million range, and was talking to private equity shops about a deal. Westergren wouldn’t talk to me about fund raising, but it’s fair to assume that his company looks more attractive now than it did in January.

As for the deal itself, I’ll spare you the details, but in essence it’s a straightforward rate cut. The deal requires a lower per-song fee than Pandora and other Webcasters were supposed to pay under the terms the Copyright Royalty Board signed off on in 2007. It’s retroactive to 2006 and calls for an increase every year up through 2015.

The new deal means Pandora will be spending more than 25% of its revenue on royalties, but it will still be paying less than it would have under the old rules. Under the original terms, for instance, Pandora was supposed to shell out 14 hundredths of a penny ($.0014) per song streamed, per listener. Now it won’t pay that rate until 2015. Meanwhile tiny sites with less than $1.25 million in annual revenue will have a different structure.

The downside is that the deal will require Pandora to tax its heaviest users since it is still paying a per-song fee. “There’s a very small percent of listeners who are using it a ton, and that’s great, except when you’re paying per song,” Westergren says. He estimates the 99-cent fee will apply to a a “single digit” percentage of its 11.5 million monthly users.

A final deal between the Digital Media Association, which is representing the Web sites, and SoundExchange, which collects royalties on behalf of the music labels and other copyright owners, isn’t expected until later this year. But “the hard stuff has been done,” says Pandora founder Tim Westergren, who has become the public face of Webcasters during negotiations.

In September, Congress agreed to let the two groups hash out new terms that would replace the ones that the government-appointed Copyright Royalty Board signed off on last year. Since then, Web radio sites, led by Pandora, have bitterly complained that rates would force them out of business.

The existing deal calls for Webcasters to pay an escalating fee to copyright owners every time they play a song for a listener. This year, for instance, Web radio stations are supposed to pay 14 hundredths of a penny ($.0014) per song streamed, per listener; site operators figure that will cost them about 2.1 cents per user, per hour.

That doesn’t seem like much, but in order to cover those fees alone (before bandwidth and other costs), operators would need pull down many more advertising dollars then they’re getting now.

Site advocates figure they’d need to be able to generate a so-called CPM rate of about $21 for every thousand visitors (over the course of an hour) under the current fee structure. That’s a hard rate for big professional Web sites to achieve. And since users generally turn on a Web radio station, then look at other sites while it runs in the background, the format is a tough sell for ad buyers.

So what’s the new rate going to be? Westergren wouldn’t comment, except to argue that the compromise still calls for “tremendously unfair” payments when compared to the fees paid by satellite radio operator Sirius XM (SIRI). That company is supposed to pay between six percent and eight percent of revenue between now and 2012.

What about conventional radio? Those stations don’t pay a penny for so-called “performance” royalties, though the cash-starved music labels have asked Congress to change that. Good luck!

The big question: Will the new rates allow Pandora, and the many smaller Webcasters, to surive? Westergren says Pandora is on track to generate $20 million in revenue this year, but he wouldn’t say whether that would allow him to break even with the new proposed rates.

But Web advertising in general is under pressure, and ad buyers say that their clients are increasingly skeptical about trying out “experimental” mediums like Web video. So unless the rates get very, very low, or Westergren’s company has hired some very, very persuasive sales people, it’s going to remain a struggle.