Big Tobacco Makes a Move Into E-Cigarettes

“A battery-operated, addiction-based market.”

While the FDA dithered, and health advocates argued, Big Tobacco began placing its bets on the e-cigarette market last year. Tobacco firm Lorillard Inc., the third largest tobacco company in America, bought privately held Blue Ecigs of Charlotte, N.C., for $135 million, driven by what the company says is a market that’s been doubling ever year since e-cigs first arrived from China in 2008.

According to the Wall Street Journal, Blue Ecigs had $30 million in revenues last year, selling through retail outlets like Walgreens, where it competes with e-brands such as NJOY and 21s Century. The FDA has announced vague plans to regulate, and state lawmakers have threatened to ban them outright, or at least place them under the same public smoking bans as cigarettes—bans that some e-smokers love to flout. (E-cigarette manufacturers, based primarily in Asia, quickly changed the electric orange glow at the end of the e-cigarette to a cool shade of blue, to help make clear to bartenders and bouncers that the thing wasn’t a lit cigarette.)

Meanwhile, Reynolds, an industry leader in smokeless products, is developing its own line of e-cigs, and is test-marketing its Vuse and Zonnic brands. “We will be in this category in 2013,” an RJ Reynolds representative said in a CNBC article by Jane Wells. “We have very big plans.”

Altria, the industry giant, is now generating $1.6 billion from smokeless tobacco products, and is expected to make a move into what is viewed as a billion-dollar industry with unlimited growth potential. Last year, the company began testing a new “nicotine-extract product” called Verve, a lozenge that can be sucked or chewed and contains about 1.5 milligrams of nicotine. Late last year, the company reportedly engaged in acquisition talks with e-cig maker Eonsmoke.

Meanwhile, the company that invented the electronic cigarette, Dragonite/Ruyan, is suing practically everybody. And the Argentinean and Venezuelan governments have attempted to ban the use and marketing of electronic cigarettes altogether.

In December, astute American TV viewers may have noticed what looked for all the world like a television commercial for cigarettes—the first since 1971, when Congress banned cigarette ads on TV. It was a commercial for NJOY Kings electronic cigarettes, a brand that currently owns about one-third of the U.S. e-cig market. Patent lawyer Mark Weiss, who founded NJOY, told Time that the company was only competing for the 45 million Americans who are current smokers, not attempting to make new recruits. In the article, Weiss noted three advantages for e-cigarettes: They’re odor free, they don’t burn tobacco, and, at about $8 per e-cigarette, Weiss claims, they’ll last you as long as two regular packs of cigarettes.

When major tobacco companies make moves like this, people notice. “I think they see this as an opportunity to get a seat at the table with opportunities to talk to the FDA about regulation over this growing category,” according to Bonnie Herzog, senior analyst and managing director of tobacco, beverage and consumer research for Wells Fargo Securities. “Lorillard wants to help steer that conversation in the right direction.”

While still a relatively modest market—no more than $500 million, compared to the $100 billion tobacco market in the U.S.—electronic cigarettes have the potential of becoming the most contentious entry in the market for nicotine delivery systems since the advent of the machine-rolled cigarette. “We think e-cigs are to tobacco what energy drinks are to beverages,” Herzog told the media.

Lorillard chairman and CEO Murray Kessler said in an earnings conference call late last year that with e-cigarettes, “you get all of the benefits of not having combustion, but on the other hand you are maintaining the behavior that cigarette smokers enjoyed.” That’s one way of putting it. And according to critics, that’s part of the problem. Anti-smoking activists often view e-cigarettes as gateway products for young adults.

They are cheaper, primarily because of heavy taxes on traditional cigarettes, and produce no second-hand smoke, only steam-like vapor that quickly dissipates. But they have had a rocky start in the U.S. An article in the Winston-Salem Journal in prime tobacco country stated that consumers have “shied away out of safety concerns since most e-cigs are made in China.” Even North Carolina health officials have expressed concerns about “limited regulatory oversight of their contents.” But according to Wells Fargo’s Herzog, Lorillard’s purchase of Blu Ecigs had the effect of “lending credibility and legitimacy to the entire category.”

Brad Rodu, professor of medicine at the University of Louisville, insisted that “tobacco manufacturers have an obligation to smokers to develop, manufacture and sell these vastly safer cigarette substitutes.” In this view, smokers smoke for the nicotine, but it’s the tar that kills them. 

In the same Winston-Salem Journal article, a professor of family and community medicine at Wake Forest School of Medicine said that “many of the carcinogens in tobacco are volatile and would vaporize, and thus be inhaled when heated. I would not recommend that product.”

It seems safe to predict that this “battery-operated, addiction-based market,” as Forbes dubbed it, will be one to watch.