A new case study by John Quelch charts the growing popularity of electronic

cigarettes and how tobacco companies and regulators are responding.

By Michael Blanding
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 cancerinducing 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?"
That is one of the many questions Quelch explores in the HBS case, ECigarettes: Marketing Versus Public Health, written with HBS Research
Associate Margaret L. Rodriguez. It examines the consequences of the
products as they have become more popularand 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 ecigarette 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 unregulatedthey 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 companiesAltria, R.J. Reynolds, and
Lorillardwill 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 happenand 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.

Advertising Symbiosis: The Key to Viral Videos

Creating an online ad that goes viral requires more than mere
entertainment. Thales S. Teixeira discusses the key to creating megahit
marketing through "advertising symbiosis."
by Carmen Nobel
It probably won't shock you that the most popular YouTube video in the past
month was "Gentleman," the latest hit from South Korean rapper PSY, whose
"Gangnam Style" is the most-watched video of all time. More surprising:
among the other most-watched videos was an advertisement for bottled water.
Evian's baby&me features several adults dancing with toddler versions of
themselves in the reflection of a store window. Only at the end of the 77second video do we see a bottle of Evian, along with the slogan "Live young."
Since its release in April, the video has garnered more than 53 million
YouTube views. By contrast, Nestl's self-explanatory "From Maine Water
Springs to You: The Journey of Poland Springs Water" has barely cracked 500
views. So why did one water commercial sparkle on YouTube, while the other
fizzled?

The answer may lie at the heart of new research by Thales S. Teixeira, which
identifies the ingredients necessary to create online videos so compelling that
viewers will not only want to watch them but also actively seek them out and
share them with friends, family, and coworkers. The research shows that if
sharing an ad will somehow benefit the sender as much as it helps the
advertiser, then the ad might go viral.
The stakes are high for advertisers. eMarketer estimates that online video
advertising in the United States will increase from $1.1 billion in 2009 to $4.1
billion in 2013an overall spending rise from 4.3 percent to 11.0 percent of all
advertising expenditures. Advertisers can get the most bang for the buck if
they post their videos on YouTube and then motivate consumers to
disseminate the ads for them, via email or social media. Getting an ad to go
viral is among the cost-saving techniques that fall under the umbrella of what
Teixeira terms lean advertising. (Other lean advertising techniques include doit-yourself content, crowd-sourced talent, and do-it-yourself distributionalso
known as inbound marketing.)

IT TURNS OUT THAT WHILE GETTING PEOPLE TO

WATCH AN AD IS ALL ABOUT EMOTION, GETTING
THEM TO SHARE IT IS ABOUT THE SENDERS
PERSONALITY.
So how do firms increase the likelihood that their ads will go viral? For
starters, they need to prioritize entertainment over facts and figures. To
paraphrase an old campaign, these are not your father's Oldsmobile ads.
"People no longer want a lot of information about the products or brands in the
advertisements they watch," says Teixeira, an assistant professor at Harvard
Business School who has spent the last four years figuring out the factors that
make or break online ads. "In the past, when a company launched a new
product, the advertisement would include all the information about the product
so you could discover whether you wanted to buy it. But now we have all the
information about all the new products available to us online. Now, we want
ads to entertain us."

But making an ad go viral requires more than mere entertainment. According

to Teixeira's research, successful viral advertising requires four key
steps: attracting viewers' attention, retaining that attention, getting viewers
to share the ad with others, and persuading viewers. "The issue is that some
content is better at the first stage, some is better at the second stage, some is
better at the third, and some is better at the fourth," says Teixeira, who will
deliver a lecture explaining how to foster each step at theCannes Lions
International Advertising Festival on June 20. "The challenge lies in getting the
best mix of all four ingredients and baking them into your ad."

TAPPING INTO CONSUMERS' PERSONALITIES

Teixeira discovered the keys to attraction and retention through a series of lab
experiments where participants viewed real ads that Teixeira selected from
YouTube, while a camera recorded their facial reactions. They had the choice
of watching an entire ad or skipping to the next one at any time. Researchers
collaborating with Teixeira then measured the participants' emotional
responses with a combination of eye-tracking technology and facial
expression analysis software.
The data showed that evoking surprise was the best way to attract attention,
while evoking continuous moments of joy was the best way of retaining it.
Thus, the most captivating ads in the experiment were those that began by
surprising the viewer and then went on to make the viewer smile.
But successfully capturing and keeping viewers' attention during a YouTube
video does not guarantee that they will share it. "People watch a lot of things
online that they would never share with anyone," Teixeira notes.
To figure out what prompts viewers to share ads, Teixeira's team conducted an
additional experiment where participants could forward ads to their friends
outside the lab. The researchers tagged the videos in order to keep track of
which ones were shared. Participants also completed written personality tests
to gauge whether they were introverts or extroverts, self-directed or otherdirected.
"It turns out that while getting people to watch an ad is all about emotion,
getting them to share it is about the sender's personality," Teixeira says.

After comparing the sharing behavior with the emotional responses and
personality tests, Teixeira found that the main motivation for viral sharing was
egocentricitythe viewer's desire to derive personal gain from sharing the
video. In this case, the potential gain comes in the form of improving the
viewer's reputation among friends and family, for example. Thus, it behooves
advertisers to create videos that not only will make the product look good but,
if shared, will make the viewer look good, too. Teixeira refers to this idea as
"advertising symbiosis" because the advertiser and the viewer mutually benefit
from the act of sharing.

FIVE EXAMPLES OF ADVERTISING SYMBIOSIS

Teixeira offers five approaches as examples to achieve virality through
advertising symbiosis:
CONCEPT:
Make
the
viewer
the
center
of
attention.
EXAMPLE: Old Spice's Twitter campaign. In 2010, Procter & Gamble
launched a campaign where Facebook and Twitter users were
encouraged to send messages to Isaiah Mustafa, the strapping
spokesman for Old Spice who markets the idea that if men can't look
like him, they at least can smell like him. The advertising agency
Wieden+Kennedy then created and uploaded 185 short videos where
Mustafa responded personally to individual Twitter users, a mix of
celebrities, politicians, and average fans. Inevitably, they supposedly
shared the personalized responses with their social networks, and many
of the videos received upwards of a million views each.
CONCEPT: Offer the viewer privileged access to valuable content.
EXAMPLE: Virgin Atlantic's sneak peek. Also in 2010, members of
Virgin Atlantic's frequent-flyer program received an email message with
a link to the airline's new commercial on the web. The ad wouldn't air on
TV for another week, the customers learned. The airline was giving
them the privilege of a sneak peek at the adand the privilege of being
among the first to share it.
CONCEPT: Give the viewer the opportunity to communicate his or her
values
to
others.
EXAMPLE: Dove's message about self-image. Two months ago,

Unilever's Dove brand uploaded "Dove Real Beauty Sketches," a webexclusive mini-documentary in which a forensic artist sketches each of
several women twice, first based solely on their descriptions of
themselves and then based on descriptions from strangers. The women
are seated behind a curtain, hidden from the artist's view. Side-by-side
comparisons of the sketches inevitably reveal that the sketches based
on the strangers' descriptions are more stereotypically attractive than
the sketches based on the women's descriptions of themselves. The
powerful tagline, accompanying a Dove logo: You are more beautiful
than you think. (Evian's "live young" campaign delivers a similarly
positive messagenot to mention the fact that dancing babies garner
the magic mix of surprise and joy.) "I think of these types of ads as
video bumper stickers," Teixeira says. "They let people broadcast their
personal values the way a bumper sticker on the back of a car does."
CONCEPT: Enable the viewer to showcase a badge of honor and relate
to
tribes.
EXAMPLE: Fiat's rapping mommy. Last December, Fiat UK released
"The Motherhood," a hip-hop video in which a British mother raps about
the joys and indignities of being a mom. ("I swapped my sexy handbag
for a snot-stained sack") The Fiat 500L makes a cameo appearance,
but her life is the focal point. The idea is that moms will share the ad
with other moms. "Fiat is not really about mothers, but the company is
providing the connection among them," Teixeira explains.
CONCEPT: Let viewers show off their ability to find strange hidden
gems.
EXAMPLE: Blendtec's wacky blender videos. In 2006, Blendtec founder
and CEO Tom Dickson launched a series of infomercials where he
sticks an object in the company's flagship Total Blender and answers
the question, "Will it blend?" Items he has blended in the series include
an iPhone, an iPad, a can of Easy Cheese, and a vuvuzela. Unlike
many viral ads, this one features the product front and center. Usually
that's a turnoff, Teixeira says, but these videos are too fun and
unconventional not to share.

As for persuasion, the final step of successful virality, marketers (with the
notable exception of Blendtec) face the tough challenge of entertaining
viewers without losing a connection to the brand. Showcase the brand too
much and viewers will stop watching, not enough and they won't know what
the video is advertising. The solution, based on Teixeira's research, is a
technique called "brand pulsing," wherein the brand or product is shown
repeatedly but not too intrusively throughout the course of the video.
And if it produces a strong emotional response, the videoand the brand
might stick with the viewer for a long time.
"When entertainment creates an emotional connection, it leaves a lasting
effect on our minds," Teixeira says. "Psychologists have shown that emotions
are memory markers, and if you feel very strongly about something during the
day, your brain will more likely retain the information related to that emotion
longer."