Can Electronic Cigarettes Challenge Big Tobacco?

NJOY's King is the first e-cigarette that looks (and feels and smokes) like the real thing. It's put traditional cigarette makers on notice.

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image: NJOY electronic cigarettes
Rosa + Rosa Studio, Inc / NJOY

A curious television commercial aired across the U.S. last month that, until its final few seconds, was indistinguishable from an ad for cigarettes — even though such advertising has been banned from broadcast TV for four decades.

In the television spot, the “cigarette” smoke, ash tip and flame look real. The carton looks authentic. The man smoking it looks satisfied.

The smoke, however, is vapor. The ash tip, plastic. The flame, simulated. The “cigarette” is a so-called electronic cigarette — in this case, an NJOY King, the first smokeless, nicotine-delivering, cigarette-like object that (at least according to its manufacturer) looks and feels and “smokes” like the real thing. Television commercials for NJOY Kings began running nationally in early December, making it the first smoking ad to run since Jan. 1, 1971, when Virginia Slims ran one final commercial a minute before the midnight deadline during The Tonight Show Starring Johnny Carson. (President Nixon had signed legislation banning cigarette ads on TV and radio the year before.)

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E-cigarettes, invented in 2003, currently account for less than 1% of the $80 billion U.S. cigarette market. But they are growing rapidly: UBS projects that sales, which have doubled every year since 2008, will reach $1 billion in 2013. Numbers like that have put Big Tobacco on notice. “Consumption of e-cigs may overtake traditional cigarettes in the next decade,” predicts Wells Fargo analyst Bonnie Herzog. “And they’ll only evolve and improve as time goes forward — at far less risk. The technology portion of it is sort of like Apple. This is just Version 1.”

The Birth of the E-Cigarette

If e-cigarettes do start to take significant market share away from traditional cigarette makers, they’ll likely be led by NJOY, which has captured about a third of the e-cigarette market. The company was founded in 2006 by patent lawyer Mark Weiss, who had discovered an electronic cigar while traveling through China the year before. The technology was crude, but Weiss saw a business opportunity. Four years later, his brother Craig, also a patent attorney, took over as CEO.

The company’s strategy and professed ideals are to some extent a function of the fact that Craig Weiss doesn’t smoke at all. In short, NJOY claims it isn’t trying to create new smokers. It doesn’t market its product to children under 18, and it became the first independent e-cigarette maker to partner with the We Card program, which helps enforce the legal smoking age at convenience stores in the U.S. It doesn’t sell flavors like piña colada or bubble gum, only traditional menthol. And Weiss says his company is only going after current smokers, the 45 million Americans who light up on a regular basis.

According to the Centers for Disease Control, 69% of smokers want to quit completely, and many of them are looking for alternatives. “Can you think of another consumer product in the world that the people who are buying it, while they’re buying it, are thinking, ‘God, I wish I wasn’t buying this?’ ” asks Weiss.

Many smokers try to quit for the obvious health benefits and the cost savings of not lighting up. For decades, tobacco has been the leading cause of preventable disease globally, and state and excise taxes have pushed prices of cigarette packs in places like Illinois and New York to upwards of $10 and $12 each.

But NJOY discovered something that smokers dislike almost as much as the high cost and the gloomy health implications. “Odor is a big thing for smokers,” says Weiss. “It’s their clothes and their hair, and it’s probably the biggest complaint that nonsmokers who are either cohabitating or co-working with smokers have about smoking.” Weiss believes NJOY has addressed this trifecta of problems: the NJOY King doesn’t burn tobacco; one e-cig (about $8) lasts about as long as two packs of conventional cigarettes; and it’s odorless.

A Virtual Cigarette

When NJOY created its new e-cig, the goal for Mark Scatterday — the King’s developer and also a nonsmoker — was to essentially create a virtual cigarette. The King is the same length and diameter as a traditional cigarette. The ash tip resembles glowing embers when in use. The cigarette itself has a papery feel to it. The “filter” is even a bit squishy.

Scatterday and others realized that to make a successful cigarette replacement, it had to not just meet the chemical needs of the user — delivering nicotine, that is — but also reproduce the full experience of smoking. For many smokers, the feel of a cigarette, the hand-to-mouth movement, the taste, even the physical act of holding the pack are almost as important as the nicotine itself. That’s one reason nicotine gum and patches have such high failure rates. Scatterday says his priority was figuring out how to “bridge the gap between your typical e-cigarette and an analog cigarette.”

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NJOY doesn’t make any health claims about its product, and its electronic cigarettes aren’t regulated by the Food and Drug Administration. E-cigarettes don’t burn tobacco, which means they don’t contribute to the wide array of deadly health problems related to smoking, which include lung cancer, stroke, heart attack, emphysema and high blood pressure.

A study released last year by researchers at the University of Athens has shown that the nicotine vapor in e-cigarettes led to an increase in airway resistance, making it harder to breathe and leading to lower levels of oxygen in participants’ bloodstream. Still, a number of doctors have come out in support of e-cigarettes as cessation devices for those wanting to quit; several have written publicly in support of NJOY and have criticized the methodology used in the University of Athens study.

But this much is clear: e-cigarettes are healthier than traditional cigarettes, and the three companies comprising Big Tobacco are beginning to either buy up electronic-cigarette companies or create their own versions.

Lorillard recently acquired e-cigarette maker Blu, which has an estimated 25% of e-cig market share, according to Wells Fargo’s Herzog. And Reynolds American is currently testing an electronic cigarette called Vuse. The only major tobacco manufacturer that hasn’t made a move is Altria, formerly Philip Morris, the maker of such brands as Marlboro, Parliament and Virginia Slims.

Analysts at both Wells Fargo and Goldman Sachs compare the growth in electronic cigarettes to the boom in energy drinks. Many of the big beverage companies failed to foresee the future popularity in energy drinks and reacted too late. The same thing may be happening with e-cigarettes.

While NJOY is independent from the three major tobacco manufacturers, there are rumors that Altria will attempt a takeover of NJOY. But for now, NJOY executives seem more interested in taking down Big Tobacco than cooperating with it. “Cigarettes haven’t evolved in 70 years,” says Weiss. “The last product innovation was the filter in 1952 and the flip-top box in 1954.”

Weiss isn’t shy about his vision for NJOY. He doesn’t want to just compete with large tobacco companies. He wants to beat them. “Our mission at NJOY is to obsolete cigarettes,” he says. “Do I believe that’s possible? Absolutely.”