23 Apr 2014  HBS Cases

Are Electronic Cigarettes a Public Good or Health Hazard?

A new case study by John Quelch charts the growing popularity of electronic cigarettes and how tobacco companies and regulators are responding.

 

When electronic cigarettes first appeared a little over a decade ago, they were hailed by many as a godsend: a tool to help smokers quit while mitigating the most harmful effects of tobacco. "The [e-cigarette] market is producing, at no cost to the taxpayer, an emerging triumph of public health," one health advocate said.

Consisting of a small barrel-shaped design that mimics an actual cigarette, the devices vaporize a liquid nicotine solution, which is then inhaled without the tar and carcinogens found in smoke. Powered by a battery and controlled with a microchip, users can adjust the amount of nicotine they inhale, gradually weaning themselves off their addiction if they choose.

"The value proposition of e-cigarettes is clear"

"The value proposition of e-cigarettes is clear," says John A. Quelch, Charles Edward Wilson Professor of Business Administration at Harvard Business School. "They provide the dubious pleasure of nicotine without all the cancer-inducing toxins associated with tobacco."

Very quickly, however, enthusiasm faded, when some public health advocates began worrying that the cure was worse than the disease. And this week the Food and Drug Administration is proposing the first federal oversight of the product.

The very fact users could control the amount of nicotine they ingested led to worry that e-cigarettes would cause smokers to take in more nicotine, rather than less. Even more worrisome, e-cigarettes could provide a gateway for young people to start smoking tobacco cigarettes, or even lure ex-smokers back to the habit.

This has created a dilemma for health regulators, says Quelch, interviewed before the FDA's action. Do they regulate e-cigarettes in order to decrease the number of new smokers who may pick up the habit, or do they apply a light hand in order to increase the number of existing smokers who will quit.

"Put crudely," says Quelch, "how many nicotine addicts is it worth the risk of creating to have one tobacco smoker quit?"

Electronic cigarettes are powered by a battery and microprocessor.
Photo: iStockPhoto

That is one of the many questions Quelch explores in the HBS case, E-Cigarettes: Marketing Versus Public Health, written with HBS Research Associate Margaret L. Rodriguez. It examines the consequences of the products as they have become more popular—and as the big tobacco companies have gotten in on the game. Quelch, who holds a joint appointment at HBS and Harvard School of Public Health, wrote the case for a new course debuting next year called "Consumers, Corporations, and Public Health," which will enroll both MBA and MPH students to consider the intersections of business and health.

"One of the themes in the course is the tension that exists, quite understandably, between regulators and commercial interests," says Quelch. "Most people are used to hearing about that in the context of financial regulation, but similar issues apply in other sectors of the economy including health care."

In the case of electronic cigarettes, existing evidence indicates that they have led to a net decrease in smoking. Of the 43.8 million smokers in the United States in 2012, 3.5 million converted to e-cigarettes; during the same period only 1.3 million electronic cigarette smokers converted to tobacco. That means a net decrease of cigarette smokers of 2.2 million, or 5 percent.

At the same time, 2.8 million nonsmokers converted to electronic smokes. But even that doesn't tell the whole story, says Quelch, since it leaves out the number of smokers who would have taken up tobacco if e-cigarettes didn't exist, as well as the number of smokers who would have quit cold turkey without the availability of electronic products. "To really determine the public health impact of e-cigarettes requires a lot of sophisticated market research and analysis," says Quelch.

A SMOKING MARKET

Uncertainty over health data hasn't hurt the product's popularity. In 2013, electronic cigarettes tripled in sales in the US to approximately $3 billion. (The overall tobacco retail market in the US is valued at around $100 billion.) Almost 10 percent of high school students have tried them, according to the Centers for Disease Control, and a growing percentage of middle school students are joining the list. In 2012, Goldman Sachs declared electronic cigarettes one of the top 10 disruptive technologies to watch.

Like most disruptive technologies, electronic cigarettes were developed by small entrepreneurs with brand names like Logic eCig (founded 2010), Blu (2009), and NJOY (2006). By 2013, according to the case study, the e-cigarette category featured more than 200 brands and their growth was threatening sales of tobacco products.

"If I am a tobacco manufacturer seeing my sales cannibalized by e-cigarettes, I have two choices: develop my own e-cigarette brand or buy an e-cigarette company," says Quelch.

Number three tobacco company Lorillard was the first to blink, buying up Blu in 2012 for $135 million and aggressively pushing them at convenience store counters. "Distribution of Blu immediately increased by a factor of three," says Quelch. Other top manufacturers followed suit, acquiring their own brands and using their shelf-space clout to increase visibility of the alternative products.

"Cigarette companies will manage the marketing of e-cigarette brands to maximize profitability for their shareholders"

The growing sales of electronic cigarettes also caught the attention of regulators. The products had been completely unregulated—they could be advertised on TV and sold to buyers of any age on the Internet. But once the major tobacco brands began acquiring e-cigarette makers and displaying those products alongside their mainstay cigarettes, policymakers took particular notice.

Public health advocates and parents alike worried about the variety of flavors, including cotton candy, that might make "vapes" attractive to children. Some states and cities responded with restrictions on sales and advertising, and, in April, the Financial Times reported that the World Health Organization will call for e-cigarettes to be regulated just like tobacco cigarettes. The US Food and Drug Administration, under mounting pressure to act, offered its own regulatory plan on April 24.

Ironically, if regulation does go forward, it might help the major tobacco companies by limiting the marketing playbook of the competitors that were cannibalizing sales of their products.

The top tobacco competitors know how to deal with regulators, says Quelch, "but with all those entrepreneurs coming out with flavors and advertising, they would no longer be able to get traction in their business."

TOBACCO COMPANIES TAKE CONTROL

Quelch predicts the big three tobacco companies—Altria, R.J. Reynolds, and Lorillard—will gain control of the e-cigarette market and then undermarket their electronic products in order to retain market share for their more profitable tobacco cigarettes. "Cigarette companies will manage the marketing of e-cigarette brands to maximize profitability for their shareholders," says Quelch. "Meaning they'll be able to manipulate prices in order to control the speed with which tobacco users migrate to e-cigarette brands."

That means that electronic cigarettes, which are now significantly cheaper on a smoke-per-smoke basis than heavily taxed tobacco competitors, will probably start climbing in price and eventually become equal to tobacco brands. That could create an even bigger windfall for tobacco producers. Even if electronic cigs are regulated like regular cigarettes, they probably won't be taxed like regular cigarettes, since the tax is on tobacco, not nicotine (and doesn't apply, for example, to nicotine gum or nicotine patches)—and any new taxes are a nonstarter these days in Congress.

By pricing electronic and tobacco cigarettes to sell similarly at retail, the tobacco companies could reap enormous profits, concludes Quelch, at the same time giving them cover against criticism by allowing them to point to "healthier alternatives" in their product portfolios.

When entrepreneurs first created e-cigarettes and marketed them as a way to quit smoking, they probably didn't intend to eventually pad the bottom line of mainstream big tobacco companies. But playing out the scenario to the end, that is exactly what may happen—and all in the absence of any definitive data showing whether e-cigarettes are more or less harmful to public health than tobacco smokes.

By pointing out such dichotomies and unintended consequences, Quelch hopes he can motivate MBA students to think more deeply about the public health impacts of business decisions, as well as getting MPH students to think about the business forces that shape public health. Only then will decisions be made that properly balance the greatest good of the public with the ability for entrepreneurs to turn a profit.

About the author

Michael Blanding is a senior writer for Harvard Business School Working Knowledge.

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Comments

    • Kusumakar
    • General Manager Group Strategy, KK Modi Group

    That's a very relevant topic that does require a truly wide debate supported by high quality analysis. Prof. Quelch's work is surely of interest to countries beyond USA. I see the relevance of this debate and research from the context of countries like India and China.

     
     
     
    • Audrey Kadis

    I sent your article along to my daughter who just received her PhD at UNC in Public Health. Her area of study is information dissemination and adoption of disruptive technologies, specifically e-cigarettes. As someone who lives in the world of public health, I was pretty sure she'd be interested in this business focused perspective.

     
     
     
    • Mithun Roy
    • Senior Manager, Asit C Mehta Investment Int Ltd

    The article very nicely points out the different perspectives - Entrepreneur & the product, Risk of Public Health involved, No definitive regulations, etc. But one thing is sure, that this product requires critical discussion at various platforms with special consideration for Public Health Policy.

     
     
     
    • David Keaveney
    • CEO, American Financial Resources

    When you have an unregulated product, like e-cigerates, available for purchase by minors of course we will see both in middle and high schools "vape". In my opinion, e-cigerates for minors play a cool factor and will eventual fade if not be pushed out by the regulators. As a non-smoker I support the e-cigerate but only if it is regulated. I believe non-smokers and former smokers alike who use e-cigerates would eventually migrate to "real cigarets". I would like to see the health studies done on e-cigerates and see what (if any) damages are caused. Regulation is important as are further health studies along with the long-term effects. Now that big tobacco companies are involved I am sure it will be business as usual, focusing on the bottom line.

     
     
     
    • Jim Mulvey

    Great article. It speaks well to the downsides of electronic cigarettes. However, nicotine has long been suspected as being beneficial to Parkinson's, Alzheimers, and Schizophrenics. Of course, the traditional cigarette is a terrible delivery system for nicotine. I wonder if e-cigs also hold the potential give these companies a marginally defensible position among some within the medical community.

     
     
     
    • Mary Ellen Miller
    • concerned person, non affiliated

    Why is there no mention that the main propellant used in these e-cigarettes is propylene glycol which is what is used in anti-freeze?

    Of course Tobacco Companies will take control. Profits trump public well being. Profits from poisoning.

    It is an old story.

     
     
     
    • Alee Tera
    • General Citizen, Family of 5 with 3 young kids

    One of the key points of being a disruptive tech is it is capable to be driven by a very small business entity or down to the individual itself. The ecig concept is so simple that it doesnt need a multi million facility for its creation. The tools and consumables are relatively easy to make and acquire. This will definitely pose a challenge for regulation or corporate positioning.

     
     
     
    • Kapil Kumar Sopory
    • Company Secretary, SMEC(India) Private Limited

    It is a misnomer to believe that e-cigarette would be less harmful than the normal variety. Rather, due to the flexibility of adjusting the level of nicotene, this has all the risk of doing worse. In view of this, the regulators' concern and initiation of planned actions to curb the addiction are welcome. Nevertheless, there still is scope for more research so that steps are eventually taken to ensure health of users is not compromised. It needs to be recognized by all countries that tobacco consumption less or more is equally a great health hazard and hence needs to be totally banned.

     
     
     
    • Shivam
    • Senior Tech Analyst, Accenture

    When e-cigs do get regularized, maybe one of the provisions could be to prevent tobacco companies from taking control of the e-cig market; under marketing & over pricing the electronic products. IMO, health care wise, e cigarettes are a win over traditional cigarettes, even with the opinions being currently divided on how safe they are. What worries me is that all the claims about how e-cigs are "equally dangerous" as traditional tobacco products, are being influenced by a strong tobacco lobby. I hope to see some honest, decisive and conclusive studies surface in the near future.

     
     
     
    • Dr Shadreck Saili

    Prof Quelch! a very thought provoking article and relevant in this era. I will distibute it to public health and business students.