The new disrupters. Photo: Mario Anzuoni/Reuters/Corbis

Big Tobacco is scared. Not, you know, because they’ve spent decades selling and marketing a lethal product while spending billions to silence their critics. But because of good old-fashioned disruption.

E-cigarettes are poised to do to the tobacco industry what Uber is doing to the taxi industry, writes Steven Davidoff Solomon in DealBook. Which is why Reynolds American and Lorillard, the second- and third-largest tobacco companies in America, are in talks to merge. With their combined power, the two companies would be a “front-runner in e-cigarette technology,” thanks to Lorillard’s ownership of Blu eCigs, which controls 40 percent of the U.S. e-cigarette market. And it would give both companies a fighting chance at winning the future.

“A giant tobacco merger would not be that much different from Facebook’s $16 billion acquisition of WhatsApp or Google’s $3.2 billion deal for Nest Labs,” Davidoff Solomon writes. And except for, well, the whole “killing more than 5 million people a year” thing, he’s right. E-cigarettes aren’t a good example of classic, Christensen-style disruptive innovation (since they’re aimed at the top end of the cigarette market), but they are innovative, and they will cannibalize the traditional tobacco market if left unchecked.

One of the reasons e-cigarettes have an advantage in the tobacco market is their health claims — which are still a subject of debate among researchers, but clearly existent. But a far bigger advantage, where Big Tobacco executives are concerned, is that while cigarette ads haven’t appeared on television or radio since the 1970s, there are still no laws preventing e-cigarette companies from marketing their products in the mainstream media. By investing in e-cigarettes, Reynolds American and Lorillard are making a regulatory arbitrage play — if you’re not allowed to market your products, buy something you are allowed to market.



To return to the taxi example, it’s as if Uber were allowed to put up huge billboards proclaiming its greatness anywhere it wanted to, and yellow cab operators were legally prohibited from doing anything to promote their cars. To keep its profit engines running, Big Tobacco has to seduce another generation of smokers. And given the ease of marketing e-cigarettes (for now), it’s no surprise that the largest tobacco companies are piling in. So while the CEOs involved in the merger may talk up the health advantages of vaping over smoking, don’t be fooled: This merger is about exploiting a gap in regulatory treatment, not necessarily a vote of confidence for e-cigarettes themselves.

