Playing to her audience, a crowd of several thousand in Toronto, pop singer Katy Perry wiggles through the last teasing bars of her latest hit single, “Hot N Cold.” She slides between the open legs of a muscular male dancer and delivers her punch line. “I wish you were straight,” she says, looking the dancer up and down.

She gets an avalanche of applause.

When you’re a former Christian singer whose breakthrough hit is “I Kissed a Girl,” your fans want you to be bad. Or at least campy. Perry, 24, manages well on both fronts. She has girl-next-door looks but paints her Kewpie-doll mouth in bright-red lipstick and favors retro, Bettie Page-like getups. She purposefully belly flopped into an anniversary cake on an MTV awards show in Guadalajara, Mexico, and teased the gay community with her song “Ur So Gay.” (Opening line: “I hope you hang yourself with your H&M scarf.”) As a button-pushing act, Perry sells. To date, she has sold more than a million and a half copies of her debut, One of the Boys, and more than 3 million of the single “I Kissed a Girl.” She has also been nominated for a Grammy.

Yet as the recording industry is remaking itself for the digital age, Perry stands out not just for her faux naughty-girl antics but for her career trajectory. To offset declining budgets and CD sales, labels are beginning to turn to the Web as a cheaper way of discovering new talent. The British pop singer Lily Allen, for example, was discovered on ­MySpace. The rock band Journey recruited its current vocalist, Arnel Pineda, after seeing him perform on YouTube. At least a half-dozen startups are trying to “crowdsource” the A&R process, Wikipedia-style, by studying what internet users listen to. Even EMI chairman Guy Hands—who took over when the private equity group Terra Firma Capital Partners bought the company—has suggested that the music business use social-networking sites to find new acts.

Perry, instead, is an old-school performer who worked toward her big break for almost a decade. The daughter of born-again Christians who didn’t allow pop music in their home, Perry released her first album—a collection of gospel songs—on a small label in Nashville in 2001. The CD didn’t sell, but Perry wrangled an audition with Glen Ballard, producer of Alanis Morissette’s Jagged Little Pill. Ballard signed Perry to his label, through which she recorded several albums of material that were supposed to come out on Island Def Jam and Columbia. But neither label felt the music Perry had recorded had commercial potential. Def Jam executives, Ballard says, “point-blank told me they didn’t think she was a star.”

By late 2006, frustrated that Columbia wouldn’t release a CD, Perry negotiated an exit deal. To make ends meet, she took a job at a small California company that critiques work by aspiring songwriters. That’s where she was in January 2007 when Capitol Records chairman and CEO Jason Flom (son of legendary corporate lawyer Joseph Flom) called her with an offer. “It was a 917 number, so I picked it up,” she says, referring to one of New York City’s area codes. Though Flom had heard a recording of Perry’s in 2006, it took a while for him to pull the trigger. “We almost made a big mistake,” he told her.

Flom wanted to pair Perry with Dr. Luke, a proven hitmaker who’d written for stars like Carlos Santana and Kelly Clarkson. “It was a tough deal to make because Luke is a very astute guy who wanted very particular things, but I managed to broker something where everyone felt good working together,” Flom says. The matchmaking took. The first single Dr. Luke and Perry collaborated on was “I Kissed a Girl.”

Though Flom declines to give details of the deal, top producers typically receive an advance against future royalties. A pop album like One of the Boys might cost $500,000 to make, and Flom started promoting it early by releasing the track “Ur So Gay” on iTunes. When Madonna mentioned that she liked the song in a radio interview, Perry became a gossip-column item. Capitol, which is a division of EMI Records, stoked interest further by placing a handful of Perry’s songs on the MTV hit series The Hills and in the movie Baby Mama. By the time One of the Boys was released, in June 2008, fans were ready to buy her music. The CD debuted at No. 9 on Billboard’s Top 200 list and went gold in September. “Hot N Cold” finished the year in the No. 1 spot on Billboard’s Top 40 airplay chart.  

Last year, Perry admitted to never having actually kissed a girl. But no matter. Her fans today greet her waving tubes of cherry ChapStick—a reference to a line in “I Kissed a Girl”—and there’s even a Katy Perry doll on the market.