Big Tobacco Is Morphing Into Big Vape

(Bloomberg Opinion) -- Senate Majority Leader Mitch McConnell said last week he plans to introduce a bill raising the minimum age for tobacco products from 18 to 21. This is a peculiar turn of events: McConnell’s home state of Kentucky is a major tobacco-producing state, and Republicans aren’t typically eager to regulate business.

What’s going on? The key to understanding McConnell’s proposal is its endorsement by Altria Group Inc., the largest tobacco producer in the U.S. And the key to understanding Altria’s endorsement is its $12.8 billion stake in Juul Labs Inc., the largest player in the vaping industry.

Big Tobacco Is Morphing Into Big Vape

The upside for Altria in this deal is clear: Juul’s popularity is soaring, while the U.S. market for cigarettes is in a steady decline. The upside for Juul is a bit more nuanced. It gains access to regulatory expertise — as Altria’s CEO put it, “We have years of experience and literally hundreds if not thousands of interactions with the FDA.”

Altria, the parent company of Philip Morris, knows how to work the system. For starters, that means preemptively crushing any allegation that its products are targeting young audiences. Starting in 1967, Philip Morris waged a 40-year war against the Food and Drug Administration’s efforts to limit the marketing and promotion of tobacco products.

In April 1997, it won a ruling in federal court saying that the FDA had no authority to regulate the marketing of cigarettes or other delivery mechanisms, even though it could regulate the sale of tobacco itself. The idea was that the government had the right to say tobacco was harmful to kids’ health, but it didn’t have the right to say smoking wasn’t cool. Despite that hard-fought win, a year and a half later the tobacco industry agreed to a settlement with the states. In addition to a $365 billion payment, the industry agreed to abide by all of the FDA’s previously proposed guidelines on the marketing and promotion of cigarette products.

From that point on, Philip Morris made a hard turn. It changed its name to Altria, which not coincidentally sounds like Altruism. It started something called Success360, which invests in organizations such as the Boys and Girls Club, 4-H and Big Brothers Big Sisters. Most crucially, it began to support increased FDA regulation. It was no longer in the tobacco business; it was in the public relations and regulatory capture business.

Altria’s strategy was deviously Machiavellian. In the wake of the tobacco settlement, as many of its major rivals struggled, it was left as the only tobacco company in America with the resources to comply with a complex regulatory environment. In 2002, Altria started campaigning to put cigarettes officially under the direct oversight of the FDA, a prospect it had battled for 30 years. Competitors decried this as the Marlboro Monopoly Act.

Now Altria is almost certainly planning the same tactics with Juul. Until 2016, Vuse, a rival product, was the best-selling e-cigarette in the U.S. In 2017, however, Juul became the overwhelming leader, its meteoric rise fueled by the development of easy-to-use nicotine salts.

But a one-time technological breakthrough is no recipe for sustained success. A partnership with Altria offers Juul an alternative route: using the power of regulations to discourage competition. The same day McConnell announced his plans to raise the smoking and vaping age, Juul’s CEO pledged his support.

Juul is already popular with younger users, so keeping competitors out helps solidify its dominance. More important, establishing the precedent that e-cigarettes should be kept away from children creates a perilous regulatory environment that the rest of the industry might be reluctant to enter. By supporting McConnell’s proposal, Altria and Juul are attempting to freeze the tobacco market just where they want it: with them on top.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Karl W. Smith is a former assistant professor of economics at the University of North Carolina's school of government and founder of the blog Modeled Behavior.

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