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by Lessley Anderson

(IDG) -- Online stores are slashing CD prices, the music labels are setting up shop online, and traditional music retailers are feeling the heat. However, at least one brick-and-mortar retailer is planning a few surprises of its own. Wherehouse Music recently launched an e-commerce site at www.wherehousemusic.com (link below). Hugh Hilton and Jason Fiber, the brains behind the site, talked to The Industry Standard about what it's like to own brick-and-mortar retail stories in a rapidly changing online world:

TIS: How has the Net affected Wherehouse's traditional business so far?

HH: The landscape is rapidly changing, and it's getting harder and harder to find firm footing. The issue we're addressing now more than anything is how we address people who sell music below cost.

JF: With respect to online retailers, we understand you can't control them, but to the extent that the labels do a lot of artist promotion with companies that break map, that is troubling.

HH: It's troubling, but it's not defeating. The real thing that would raise our ire would be if Sony did it with Sony, for instance, if a label sold music without channeling to a retailer.

TIS: Well that's about to happen with Universal and BMG's announced joint retail venture, GetMusic.com. What do you think about that?

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HH: We're looking at it very closely. As a pure retail competitor, that's one thing. But we're very concerned with the recent announcement that Bertelsmann will leverage its remaining assets to take it [GetMusic.com] public. If the way they're going to build value is to exclude their retailers on certain content, that would really get our attention.

TIS: What about offering some exclusive content of your own? Tunes.com and MP3.com are doing it, with their artist pages and MP3 downloads. Have you considered doing something like that, to find hot talent before the majors get to them?

JF: Yes, we have. Stay tuned for future announcements on that.

HH: In terms of that model, we offer something the online guys don't: national distribution. Let's say I was an unsigned artist, and I wanted to go somewhere to kind of place my content. MP3.com started it off, then Tunes.com came along and said, "That's pretty cool, but we're going to filter it, and the editors from Rolling Stone are committing to spend time and pick the best stuff." Well, people are going to say, "That's great, but I want into the physical store." That's where 98 percent of music is sold. We could offer that artist national distribution and in-store presence. That's a pretty powerful inducement.

TIS: Doesn't that mean war with the labels over talent?

HH: The thing I find most interesting is we've got an industry that used to have distinct functions and companies that were content to stay in their layers. All of a sudden, the different individual companies in the layers are suddenly saying, "Wow, we could be doing this ourselves. We don't have to engage with the other people." There's a lot of tension and confusion. Like, "Well, if you're going to be retailing music now, that kind of puts a damper on our relationship." It's like if you take the sprinkler business: Imagine if the gardener started to manufacture sprinklers, and then the pipe companies wanted to care for the lawn.

JF: It's a convoluted, unique situation. We're trying to rethink who we are.

TIS: In some ways, the site looks like a traditional e-commerce site. How do you hope to compete with established online music sites?

HH: Our first objective was to launch the best possible e-commerce site, which took 9 months to develop. Initially, we had a defensive strategy, but as the whole technology movement started moving so quickly with respect to digital downloads, it clearly became apparent to us that to enter the market with a modest online strategy was not going to be sufficient.

JF: We are test-launching our Celebrity Lounge and officially launching it June 10. That's going to be one hour interviews with different celebrities, taking questions from Club Wherehouse members, with streaming real audio and video, as well as using ichat software.

HH: We're also in the process of finalizing a few partnerships to deliver community features and are in the middle of strategizing our download efforts.

TIS: How do you hope to compete with established Internet brands like Amazon.com or the Ultimate Band List?

HH: People go on the Internet for music in two ways. They either want to cruise around or they want to buy. And when they want to buy something, we're going to leverage our brick-and-mortar assets to make that more attractive to the consumer.

TIS: How are you going to exploit your existing retail outlets?

HH: Well, besides being able to promote the site in the stores and on packaging, we are considering offering a favorable returns policy, in which customers can return things they bought online and weren't happy with, to one of our many stores.

TIS: Saves the cost of postage.

HH: Many of these sites, like Tunes.com for instance, have assets that are great, but easily replicated. We look at companies like these, and say, "we understand your online strategy, but what's your offline strategy?"

TIS: Why would an online music store or site need offline support?

HH: We're hearing that more and more of these companies are being pressed by their investment bankers for their offline strategy. I think the investors don't see these guys coming to profitability any time soon because of the money they're spending on portal deals, etc. They're wondering if these companies are ever going to make any money.

JF: The cost of customer acquisition in the online world is between $25 to $50 a customer. In the brick-and-mortar world, it's as low as $2 per customer. All the people who drive by these physical stores are potential online visitors.