Several years ago, I went to a splashy launch party for a new tech product, which is a pretty normal thing for tech companies to have. It was at a hip warehouse space in Manhattan, there was cool lighting and a great DJ, free food — the company had pulled out all the stops. And the company had invited a ton of Instagram influencers and model types, so there were lots of beautiful young people there doing exactly what the company had hoped they’d do: taking photos and videos with the new product, talking about how cool it was, and posting it to social media.

Now, if I was talking about a new smartphone, or a camera, or a laptop, this party would not have stuck out in my mind, but this party was for a product called the Juul. And the Juul was — and still is — one of the most potent and effective nicotine delivery devices that’s ever been created. Juul’s big innovation was a nicotine formulation that made its vape hit just like a cigarette. And the party kicked off a marketing blitz that seemed pretty directly targeted toward teenagers on social media.

After that, the Juul became a sensation — and a sensationally dramatic story. The marketing helped, but also it turns out nicotine is addictive as hell. A Stanford tech startup that had been founded to disrupt the smoking industry had upended years of US tobacco regulation, gotten a new generation of teenagers addicted to nicotine after years of declining smoking rates, and eventually found itself valued at $38 billion after a huge $12.8 billion investment from Altria — the company that used to be called Philip Morris. You probably know it by its most famous product: Marlboro cigarettes.

Then it all fell apart: the lawsuits came, the FTC sued to unwind the deal, the valuations of both Juul and Altria collapsed, and Juul itself faces being regulated entirely out of the market in the United States.

How did this all happen? How did a startup that was founded to stop smoking end up in the pocket of Marlboro? How did Altria screw up this investment so badly? And how did a couple of Stanford kids figure out a better cigarette before the cigarette industry?

To find out, I invited Lauren Etter on the show. Lauren is an investigative reporter at Bloomberg News and the author of a new book called The Devil’s Playbook: Big Tobacco, Juul, and the Addiction of a New Generation. Lauren tells us the story of how the cigarette industry went from hiding and lying about research that showed nicotine was addictive to being one of the most regulated industries in the country — and then, how that provided an opening for Juul to do things the cigarette companies could never get away with.

The book is terrific — even if you don’t care about nicotine and smoking, if you’re a Decoder listener, you’re going to recognize a lot of themes in this conversation. There’s a big industry that’s slow to adapt, there’s a startup that’s moving fast and breaking things, there are regulators around the world who don’t quite know what to do, and at the center of it all, there’s a big question about our society’s relationship with a product that might be bad for people — and that people still want.

Just a couple days after we recorded this episode news broke that Juul has agreed to settle a lawsuit brought by the state of North Carolina that claimed the company’s marketing practices caused a sharp rise in vaping among minors. Juul will pay a $40 million settlement, but it’s also agreed to something else: it won’t use anyone under the age of 35 in its marketing anymore. The party is officially over.


The following transcript has been edited for clarity.

This is your first book, and I have to say it was a very impressive first book. We covered the Juul story at The Verge as a tech story, but you’ve written a health story, a really complicated business and regulatory story, and also the story of the tobacco industry and what it has become in this country. How did you start looking at Juul in this way, and how did you end up writing a book about it?

I started writing about Juul after the outbreak of lung injuries, this mysterious outbreak called EVALI [e-cigarette or vaping use-associated lung injury]. I started writing about it from a health perspective and trying to figure out what was going on, just like the rest of the nation trying to figure [this] out. Is this related to vaping? So I started covering some of those stories, and then I became interested in Juul as a business story. It was fascinating to me that a company that had found itself in the middle of this public health crisis was a Silicon Valley firm.

As I embarked on a book, I was really endeavoring to tell the story of Juul, but I quickly realized it was impossible to tell the complete story of Juul without telling the story of the tobacco industry. Those two industries were so intimately intertwined that it became evident to me that I needed to also write about the tobacco industry. That’s why I ended up with these two intertwined narratives.

Give people the really short version of the Juul story. This is a famous product. It was all over the news. Lots of people use a Juul, but it has a really sharp rise, and then a really sharp fall.

Most people know about Juul having launched in the summer of 2015 with this flashy nicotine device called Juul, and quickly taking off and taking over the entire industry and leading to a youth health crisis. All the teenagers started using it. But actually, the founders of Juul had been working on coming up with a better, healthier, less harmful alternative to the cigarette for years before Juul. Adam Bowen and James Monsees, two Stanford grad students, started working on... it’s almost like a myth and a legend by now. A lot of people know this story. They met at Stanford, in the design school. They were smoking cigarettes out back as they kind of pondered their next project, and they realized that it was idiotic to be smoking this burning stick, essentially shredded tobacco leaf rolled in paper, lit on fire. The same product that people had been using for more than a century.

And here they are in the heart of Silicon Valley, where everything is ripe for innovation. And they realized, why hasn’t the cigarette been innovated on? So they set out to innovate the cigarette. As they embarked on that, they found some of these old tobacco documents that had surfaced during the 1990s in the heat of the tobacco wars, and there were millions of documents that the tobacco companies had to hand over, to make public, as a result of litigation that had nearly buried them. They tapped into that, and had many, many iterations of their product before it became Juul. It launched in 2015, ultimately, and just became the most popular e-cigarette on the market. They marketed it on social media, on Instagram, on Facebook, on Twitter. They sent kind of traveling troupes of these nicotine Juul marketers that handed out free samples at parties, on yachts, in the Hamptons, at raves, and it just became extremely popular.

It became popular among 20-year-olds, and among teenagers as well, middle school and high school students. So that was the moment, as it became just a runaway success, that it attracted the attention of public health regulators, of the FDA, of members of Congress. It just became this huge issue, where Scott Gottlieb, the then-FDA commissioner, called it an epidemic of youth usage. So basically, the company found itself under this incredible scrutiny from every angle. And at the same time, the traditional tobacco industry had also been trying to innovate on cigarettes, their declining business. The cigarette had been in decline for decades. Everybody agreed that the business was only going to continue to decline as people realized the adverse health effects of smoking, and it was not as cool to smoke cigarettes anymore.


And so as big tobacco tries to innovate, they cannot out-innovate Silicon Valley. So at the end of the day, Altria, the maker of Marlboro cigarettes, decides to invest in Juul. In my book, I write that was the moment the glass shattered for Juul. It just attracted so much scrutiny, because all of these years, the founders of Juul had been saying, “We are the anti-cigarette. We’re going to kill the cigarette. We’re going to kill the tobacco industry,” and suddenly they’re in bed with the tobacco industry. That really kind of put them on blast in a new way.

They were under health regulators’ scrutiny, and their valuation, which once stood at $38 billion, was just tumbling quarter after quarter after quarter. And now, there’s been a huge reorganization in the company. They brought in all these new executives, many from the tobacco industry, and they’re essentially fighting for their survival right now. Juul, like every other e-cigarette maker, has submitted an application to the FDA, and now the FDA has to determine whether or not it’s in the public health’s interest to allow this product to continue to be marketed.

Basically, we’re all waiting. It’s expected sometime this year, for the FDA to decide whether or not it can be sold. If the FDA does not allow it to go forward, Juul has no product to sell. And if it does, I think Juul is well-positioned to continue to grow and take over the market. So they’re at a real inflection point right now.

That is just a staggering rise and fall. It’s two kids at Stanford looking at a product that they’re using, doing the tech industry thing, asking this kind of hilarious bubble question of, “Why hasn’t anybody innovated this thing,” realizing that actually lots of people have tried to innovate it, using some of that, and then all the way to now potentially facing regulatory doom.

Exactly.

The big innovation with Juul was not really the design or the pods. It was the nicotine formulation. How did they stumble on a nicotine formulation that hits like a cigarette? Because early vapes were really, really harsh.

This is Juul’s secret sauce, the nicotine salts, of course. Early [e-cigarettes], what they did was they essentially just took nicotine and they added some flavors to it. But the problem with just using nicotine is, it’s extremely harsh. It has a high pH level. It burns your throat. Early iterations of e-cigarettes, they could only put in small amounts of nicotine so it wouldn’t be so aversive to your lungs. The problem with that was that it didn’t satisfy smokers. because there wasn’t enough nicotine in it. So they’d have to puff and puff and puff on the thing and it just wouldn’t deliver the satisfaction. So, that had been the number one complaint by e-cigarette users.

So, Adam and James, they had done tons of research. They had delved into these tobacco archives, which contained all kinds of science about nicotine and about tobacco. The science of tobacco smoke and nicotine chemistry is extremely complicated and complex, and they were able to use some early research that showed if you modify the pH levels of tobacco smoke you can deliver different satisfaction levels, enjoyment levels, that type of thing. There’s also a body of research that showed, if you add organic acids to nicotine, it lowers the pH but you can have higher levels of nicotine. Essentially, by adding the organic acids, you create a nicotine salt, and that allows the pH to go lower, but you have a higher amount of nicotine. So what that does is enable you to inhale a large amount of nicotine without burning your throat, without you starting to cough a lot.

I should also point out that they hired tobacco industry scientists. They had them on speed dial. They would call them and they would ask about the different various organic acids and how that could modulate the pH. And they did all kinds of research and they absolutely turned to tobacco industry executives and to the tobacco files, the archives, to help them solve the problem. They eventually did their own experimentation in Dogpatch in their offices there, where they were adding various organic acids to nicotine to see what the most satisfying ones were. And they ended up going to New Zealand where they did their own tests on human subjects, including on Adam Bowen himself, to determine which organic acid in nicotine would give you the highest level of satisfaction, and what would make your heart race the fastest. When you take these little surveys, what would be the most satisfying one?

So they did all kinds of just really organic research and ended up settling on benzoic acid as the organic acid that was the most satisfying. This enabled them to do something that no other company had really done, which is devise a nicotine solution that had a high nicotine content, in this case 5 percent, which was ultimately marketed, but with a very low aversive component to it.

They picked benzoic acid. They have a patent. The patent lists every other kind of acid you might want to use down to citric acid. That prevents anyone else from doing this, right? Was that it? Was there another way around this problem? Because when I first saw that patent, I was like, “Oh, Juul’s going to win. Now they can block everybody else from doing the thing that made their product better than everybody else.”

There’s definitely been IP litigation over this. And there probably will be in the future. I just don’t know how much Juul is going to be able to prevail on essentially owning chemistry. This is basic organic chemistry. I don’t know if it, at first glance, gives them the patent protection or the IP protection, that you might think.

I’m really interested in that arc and sort of pulling apart the bits and pieces of that, but what struck me about your book is that you don’t start with Juul at all. You start with Altria, which is the company that was known as Philip Morris, that made Marlboro, and you start with them in sort of the very late ’90s, early 2000s. And it seems like what the entire cigarette industry was struggling with was, we’re going to be a regulated industry.

We’ll be intertwined with government regulators. We’ll be intertwined with health officials. We have to learn to be that kind of company where the government is kind of always up in our shit. Tell me about that, because there’s a really big parallel, not in terms of the product, but in terms of the attitudinal shift that the entire tech industry is facing right now.

You and I are talking, and Congress is literally talking, about antitrust bills, simultaneously with our discussion today. But it just feels like that attitude shift created the opportunity for someone to not have the baggage and make the Juul, when if Philip Morris had invented the Juul, I mean, their business would have been secured in a different way, but they were just unable to.

Yes, that’s exactly right. I started the book in the middle of a hurricane in Puerto Rico, because I felt like it was emblematic of what the industry was going through, the tobacco industry.

The book starts in the middle of a hurricane. You were not in the middle of a hurricane.

Right, correct. The book starts in the middle of a hurricane in Puerto Rico, and Philip Morris, the company now known as Altria, had gathered all of its corporate relations officials and executives, and met there as kind of a retreat to talk about this huge moment in the industry where they had to admit that they had deceived the American people, that they had lied, that they had covered up all of this information and evidence about how deadly cigarette smoking was, and it had all come out into the public.

The FDA commissioner, David Kessler, at the time, had made it his mission to go after the tobacco industry to bring it under its regulatory authority for the first time. State attorneys general were suing the tobacco industry and the tobacco companies for all of the public health effects and the costs related to treating smoking-related disease, and every week there was a new headline on the front page of the Wall Street Journal and the New York Times about the misdeeds of the tobacco industry in the ’90s.

It really was this important moment that I thought almost paralleled where we are today with Juul. So, they realized that they needed to have this permission to exist, and Juul essentially finds itself in the exact same position now, where they’re kind of operating only if the FDA gives them permission to operate. They’ve realized that they created a youth usage crisis, or helped create it, and that they have to be incredibly careful about it. But the interesting thing is that when Juul launched, when Adam and James decided to innovate on the cigarette, they had none of that baggage that the tobacco industry had. They had not been through the trenches, and they didn’t approach the industry — this highly addictive product, nicotine — they didn’t approach it with the necessary care in order to give their product a chance at surviving and asking permission from society.

It’s like the motto of Silicon Valley, “Move fast and break things. Ask for forgiveness, not permission.” And that’s exactly the mentality that they embodied early on when they launched Juul, and it’s also the mentality that allowed them to crush the market, to take over, and to basically flood the nation with Juul. So there are lots of similarities, lots of parallels between those two narratives.

Well, let me ask you about that, because the lack of baggage enabled them to make a product that Philip Morris and the other big tobacco companies had been trying to invent for years, and because of their own regulatory problems and their own wacky international corporate structures, they weren’t really able to do it well. And the Juul team had none of that baggage. They were able to say, “What people want is nicotine,” which the tobacco companies really could not say, given the regulatory scrutiny. And then they were able to deliver the nicotine salt formula in the pods of the Juul.

I think a lot of people will tell you they’re very happy using a Juul instead of smoking a cigarette, and that is probably a net good, although I have some questions about that too. The thing that I struggle with in this entire story is, “Well, it’s better than smoking.” And so if the tobacco companies were not able to make this product, is it a net good thing that a startup that made a lot of mistakes along the way didn’t need to ask permission to exist, eventually did develop a product that is, in some measurable way, better than smoking?

You’re hitting on the exact controversy, and I think it’s super important to talk about it in this way. First of all, it’s partly a socio-cultural question about nicotine. Why do people use nicotine? Why do they want to use nicotine? It provides pleasure. I mean, it does lots of great things. It provides pleasure. It can help you concentrate. It can help you focus. It can relax you. There are all kinds of appealing aspects to nicotine, I should point out, and this is also a very important point, it’s not the nicotine in cigarettes that kills people. Nicotine has some adverse health effects, but largely not many. There are even some studies showing that nicotine can help in the treatment of serious diseases, including Parkinson’s.

But what kills people when they smoke cigarettes, the deadly aspect of a cigarette, is the combustion. And this is kind of the thing that Adam and James focus on, is the combustion. It’s the lighting on fire, the burning, inhaling these toxic chemicals that form tar droplets that end up affecting the lining of your lungs and causing lung disease. So people smoke cigarettes because they want nicotine. Why do people want nicotine? Well, they’re addicted to it. I think the addiction element is sort of the most important and most interesting aspect to focus on, because what’s so bad about nicotine? Well, you could potentially become a lifelong user of nicotine. So I think when we’re talking about adult smokers, we know the reason they smoke is because of the nicotine. They want the nicotine fix.

So why not give them a better, less harmful alternative that doesn’t involve combustion? And that’s the e-cigarette. So it sounds great. I will point out that there haven’t been enough long-term clinical studies to show that there are zero adverse health effects. I think most people agree, and most studies show, that there is a net benefit if you quit smoking and only use e-cigarettes. A lot of e-cigarette users also continue to smoke cigarettes. That’s called dual use. If you’re an adult smoker and you just switch from cigarettes to Juul, for example, you’re probably better off in the long run. The issue revolves around the kids, teens, and young people who become attracted to the product and develop a lifetime nicotine addiction. If you can separate that controversy out from the adult usage issue, then the industry would be okay.

I think that’s the industry’s plan. The e-cigarette industry’s plan to survive is to focus on the adult smoker. So, back in the 1990s at the height of the tobacco wars, almost 40 percent of teens smoked cigarettes. They were tobacco users. By 2015, when Juul launched, it was down to like 10 percent. So it had been this huge public health coup that they had successfully gotten the youth tobacco use rate down to such a low percentage. So when Juul launched, and other e-cigarettes as well, suddenly you saw this rapid increase in the number of teenagers who were using e-cigarettes. Now, yes, better than a cigarette, but [they’re] still adopting a nicotine habit. Can you prevent youth from getting addicted to nicotine? Because I think most people agree that there’s no real redeeming quality for a teenager to just start using nicotine.

“It’s never been about anything else but nicotine.”

First of all, their brains are not fully developed. There’s all kinds of science and studies showing that nicotine, before your brain is developed, can have all kinds of adverse health effects on brain development. You become more addicted because the pathways in your brain become solidified, and so you develop a greater addictive potential. It’s really a question about, who’s the problem? Where does the problem lie? If we’re talking about youth usage, then I think most people would agree that we don’t want kids adopting a new nicotine habit. But if you’re talking about current cigarette smokers, there’s a pretty compelling case to say that a less harmful product that does not involve combustion, like an e-cigarette, can actually have a net benefit to society. So the problem for Juul was that they didn’t set up the opportunity for themselves to initially go after the adult smokers.

They ruined their opportunity early on by essentially committing the cardinal sin in America, which is contributing to a new youth nicotine epidemic. I think those two issues often get conflated, and people start yelling over one another. They’re kind of talking about different things, but unfortunately they’re intertwined. There’s a moment in my book where I interviewed Mike Moore, the former famous attorney general who in the 1990s took on the tobacco industry, and he described it to me in a way that I thought was really interesting. He said, “Companies have made billions of dollars getting people to suck something into their lungs.” He says, “I hate to say it so clear, but how could you possibly sell that? There’s only one answer, and the answer is nicotine. It’s never been about anything else but nicotine. Without it, there’s nothing. There’s no cigarettes, there’s no Juul, there’s none of it.”

That was a powerful conversation, because it highlights and underscores just how dependent these industries are on addiction. One other thing that’s important to point out is that 90 percent of adult smokers today began smoking before the age of 18. Ninety-nine percent began smoking before the age of 25. The whole concept dating back to the 1990s was, if you can cut off the youth from nicotine addiction, you won’t have a next generation of users. From a public health standpoint, that’s fantastic, because then they wouldn’t be smoking cigarettes. For the tobacco industry, that’s a complete disaster, because that means if they do not have the next generation of users, they do not have an industry that has a long life. So for me, the controversial issue is less about whether adult smokers should be using e-cigarettes to quit smoking, and more about the continuation of nicotine addiction that continues to addict new generations of users.

A lot of the scrutiny around Juul occurred because of the vaping-related illnesses and deaths that were happening in the Midwest. That led to a crisis of “is vaping bad?”, which is yet another track from “is nicotine bad?” It’s another way to conflate all this. Is vaping bad? What was the result of all that? And how did Juul get caught up in it?

When the lung injury outbreak happened, everybody just assumed it was Juul, or at least it was vaping, because basically you had these kids showing up to hospitals who had chronic lung injury, almost as if their lungs had been burned, and they were on breathing machines and that type of thing. It was a very serious problem. And then you had adults showing up at the emergency rooms, the same thing. They had these chronic lung injuries.

I think immediately the media attention gravitated toward Juul because Juul was the most popular product on the market. Juul had been singled out as the one causing the youth vaping epidemic. And now suddenly you have all these kids who vaped showing up at the emergency rooms.

So it was a huge PR crisis for Juul, and the CEO at the time had this fateful interview where he went on national television and said, “We just don’t know. We don’t know if vaping is safe.” But as the FDA and the CDC began their investigation into the lung injuries, over months, it took them months to figure out that it probably was linked to bootlegged THC products that were being vaped.

So these were pods that were laced with this product called vitamin E acetate, which is a syrupy, golden liquid that a lot of the bootlegged products were cut with in order to either make it more syrupy or in order to make it last longer, to go further. And so the CDC ultimately said it was most likely related to these products that contained this ingredient.

By the time that the CDC got around to announcing that, the damage had already been done for Juul. Their product had taken such a hit on the market, people were so spooked by vaping and by Juul-ing, that by the time that the CDC clarified things, it was too late. There were all sorts of people who were furious at the CDC and the FDA for taking so long to come to that conclusion and for wrongly singling out just vaping as the problem.

However, I will point out that the CDC, to this day, continues to say that there’s a small percentage of these lung injuries that were tied to nicotine-only products, not the THC products.

Then you heard stories of people who started going back to cigarettes because they were so spooked by the lung injuries. And people saying, “Oh my God, the FDA or the CDC should have cleared this whole thing up earlier.” It was a large misunderstanding, but it was also a catastrophe, and it was really bad for the industry. It was really bad for public health, but it also does underscore that there’s still a lot of research that needs to be done on e-cigarettes to determine if they do cause any long-term health problems.

The focus on nicotine is what enabled Juul to succeed as a company that thought of itself as a tech company, as a disruptive company, in those very heady days of 2015, when tech companies were going to disrupt everything. And they saw a big, lumbering industry. They said, “They don’t even understand their own product. They don’t even understand what they’re selling. We can make it sharper and better with a focus on design, with a focus on delivery, innovation, all of the buzzwords.”

Is Juul a tech company? It seemed like a threshold question for us, right? We’re a tech and science website. We realized we wanted to cover it. And we’re like, well, it’s a tech company. They act like a tech company. They talk like a tech company. Now many years hence, we realize a bunch of those companies were not actually tech companies. WeWork was not a tech company. Was Juul a tech company?

I think Juul is a tech company, as much as they would like to distance themselves from that now. They sell hardware, there’s software involved, [and] they innovated. They brought to bear the use of technology in order to innovate on a product that had zero technology in it. They disrupted, they raised venture capital.

It’s a big debate on our team over whether they’re a tech company. And I think for us, what qualifies something as a tech company, is whether you have the margins of a tech company, whether you make a piece of software and sell it over and over again. Juul has a very mechanical product. They have to manufacture the liquid in the pods, they have to manufacture the pods. And they had a lot of, “Oh crap. We make a hardware product with liquid in it,” problems along the way. And that ran right into some very strange regulatory moments that you unpack in the book. I’m curious if you can tell that story and kind of help me understand how they got through it.

So essentially, their technology, it’s a battery. It has a little heating element in it. The battery actually heats the pod. You insert the pod and when you suck on it, it triggers the battery to heat up and create the vapor. So, there’s also some electronics inside. What they found early on, and what most e-cigarette companies found, was that the liquid contained in the pod, the nicotine liquid, would leak down into the guts of the Juul device.

When you’re a startup and you’re scrappy and you’re trying to gain market share, having these kinds of glitches in the functioning of your technology is very, very problematic. What Juul set out to do was to fix the problem. It wasn’t an easy fix for a variety of reasons. They couldn’t figure out for the life of them why the pods were leaking and how to solve for that issue. They would take the pods on airplanes and over mountain passes in order to figure out, was it the altitude that was causing them to leak? Was there some other design glitch in the manufacturing process that was causing them to leak? But it was a huge problem that they had to solve for internally.

The problem for Juul was, at the time, the FDA was cracking down on the industry. And they came out with this law that said, for the e-cigarette companies, that you could continue selling your product, but you couldn’t make any modifications to them. The FDA was essentially trying to freeze the market so there would be no new entrants and they could kind of wrap their arms around this unwieldy market.

Juul took risks tobacco companies wouldn’t

So they said, “If you have your product on the market, we’re not going to enforce against you. You can keep selling it until you file this PMTA [premarket tobacco product application] and get the thumbs up or thumbs down from the FDA. But in the meantime, you’re not allowed to make any changes to your product.” I think this is a moment where Juul really embodied the Silicon Valley ideal of move fast and break things, ask for forgiveness, not permission.

They actually ended up changing their device. There’s a lot of argument around whether or not the change that they made to the device rose to the technical definition of a modification and whether or not that was a breach of the FDA’s rule. But the fact of the matter is, they did modify their device after what they called the deeming date of August 8th, 2016, at a time when you were not supposed to do it. But Juul was at this moment where they were like, “If we don’t fix this, we’re screwed and we’re going to just get crushed by competitors. But if we do fix it, the FDA will probably never know and they’ll never ask us about it.” And it was a tiny enough modification. They changed the structure of the pod a little bit. They changed some of the internals on the motherboard. They changed some of the way that the product actually worked. They put a new sensor inside of it that would withstand leakage better, that wouldn’t cause it to brick, that type of thing.

I thought that was a really interesting moment for Juul, because the tobacco companies might not have done that even though they face the same risk. And in fact, there was a very heated debate inside Altria because they had a similar kind of leaking issue. And they debated for a long time whether or not it would rise to a modification and be in breach of the FDA’s rules.

While that’s all happening, Altria is freaking out that Juul exists, that it’s going to steal their market share and destroy their business. They’re paying a lot of attention to Juul. And they’re the ones who find the change before the government finds the change. Why didn’t they just copy the Juul? When I think about big tech companies now, they just relentlessly clone their smaller competitors, all of the time.

Why didn’t Altria, as it’s looking at the Juul so closely — they’re buying them and realize that they’ve made this change; they’ve already effectively reverse-engineered it to understand what’s going on — why didn’t they just copy the Juul?

It was a question I just kept asking over and over again. How could Altria have been so behind or so clueless? Exactly your question, I would ask that. And the answer is sort of multifaceted. Altria was, number one, they were late to the game. When they introduced their very first e-cigarette product, they called them “cigalikes.” It was one of those that looked like a cigarette and it had e-liquid inside, but it was really trying to approximate a cigarette. It was cylindrical. It was wrapped even in this paper material, it was white, it had a glowing tip, so when you sucked on it, it looked like a cigarette. That was the first product that they put out on the market.

That was around 2013, 2014, then Juul hit the market in 2015. And yeah, they start doing the teardowns of Juul, just like they do with any other product; figuring out, “What is this thing? It looks like no other product on the market. We’ve never seen anything like this before.” And they honestly debated for so long whether or not it was going to be a threat to their product and to their industry. And they had different management before Howard Willard, [the current CEO of Altria], took over and ended up doing the deal with Juul.

But at the time, the management was very circumspect about the long-term viability of the e-cigarette market. They thought that regulators were not going to tolerate another nicotine product on the market without going through lots and lots of regulatory hurdles. They believed that this market would not last for long and that they didn’t really need to pour tons and tons of money into it in order to innovate. They already had sort of gone down that road, but a little bit reluctantly.

Altria, their future plan before Juul came around, was that their harm reduction play was going to be in smokeless tobacco and snus. That’s what they were thinking. They were thinking of going in the direction of, people are going to use nicotine in a pouch. When Juul hit the market, they were just kind of already behind the ball, even though they had done decades and decades of research. And by the time they realized it was actually a threat to them, the FDA had implemented the deeming rule in August of 2016. And all the companies were forbidden from putting any new product on the market.

Altria dragged their feet for so long and kind of underestimated the trajectory of the market. By the time that they realized, “Oh shit, Juul is actually this crazy product that’s just eating our market share,” they couldn’t do anything about it. They could not introduce a new product to the market.

So the FDA has the deeming rule. At the same time, Altria knows that maybe it could kill Juul by going after the regulators. It seems like the cigarette companies wanted to be seen as the responsible adults, even though they sell cigarettes, and they wanted to cast the tech companies, the vape companies, as being reckless upstarts. At some point, the Trump administration gets involved. The whole thing becomes very politicized, and Altria ends up making this gigantic investment in Juul. How did that all come about?

So in this bout of desperation, when Altria is realizing that Juul is an actual threat, they actually start scouring the globe for products that they could just simply buy, that had been on the market prior to August of 2016. They ended up finding this Chinese manufacturer that had this product that they could prove had been on the market prior to 2016.

So they did introduce this, what they deemed to be their competitor to Juul, which was MarkTen Elite. It looked kind of similar to Juul. It had the battery and it had the little pods. This was Altria’s very first pod product. And they didn’t introduce it until, I’m forgetting the date right now. I think it might’ve been 2018.

But the problem with that product is that it was absolutely terrible. It didn’t have the nicotine salts like Juul. It was ugly. It didn’t have the form factor, didn’t have the Silicon Valley je ne sais quoi, and people didn’t really like it. But Altria tried flooding the market with that product. They would figure out, “Where’s Juul doing really well in sales? Let’s go there and just try to cut the price of their product to have this price war.”

They really did put up a fight for a while. And they realized that there was no hope. MarkTen Elite was a terrible product. Everybody knew it. It was almost an internal joke where they were just like, “It’s pathetic, that we’re trying to compete with Juul when they have 60, 70 percent of the market and our product isn’t even close to what they have.”

Once Howard Willard became the CEO of Altria, he was of a mindset different from his predecessor in that he thought they should consider doing a deal with Juul. Like, “Let’s try to buy Juul. Instead of competing, let’s just try to buy our biggest competitor and make them part of our brand portfolio.”

And that had been a strategy that Altria had used for years. In the smokeless market, when they couldn’t figure out how to make a brand that was competing with Copenhagen, they just went out and bought it. This was sort of an old playbook for the tobacco industry. And so they started thinking, “Well, let’s buy Juul.” They engaged in negotiations over a very long period of time, starting in 2017. And there was all this back and forth.

Altria initially wanted to just buy Juul outright. And Juul immediately was like, “We have no interest in selling outright. We want to retain control of the company.” And so there are all these negotiations going back and forth and they ultimately decided to invest $12.8 billion into Juul for a 35 percent share; at the time, the company was valued at $38 billion.

I should point out, this entire transaction, the Federal Trade Commission has sued... What happened was, Altria, weeks before the deal was announced in December of 2018, they just took MarkTen off the market, their Elite product. They told the FDA, “We’re so concerned about the youth usage issue, that we want to be a team player. We want to show you how responsible we are and how concerned we are for public health. We don’t want kids using these pod products. So we’re going to be responsible and we’re going to remove MarkTen from the market.” That’s what they told Scott Gottlieb.

Well, less than a month later, there was this announcement that Altria had purchased a 35 percent stake in the biggest pod product on the market, that had been seen as the biggest contributor to the youth usage issue. Scott Gottlieb was furious. The FDA felt like this was just entirely duplicitous and basically just said that they were playing the FDA like a fiddle. Then months later, the FTC sued to unwind the deal between Altria and Juul. They alleged that it was anti-competitive because Altria took its MarkTen product off the market and colluded, in order to gain a larger market share. The trial is going on right now.

Doesn’t it kind of make no sense, though?

It depends on the way you look at it.

You have a crap product. You know you’re not going to succeed. The nicotine salts are patented, you can’t go after them. You shut it down to buy the small company that makes a good product. That’s just Business 101. What is the actual collusion there?

The idea is that Altria could have competed in the market that they had intended to compete in, had there been another large player with deep pockets in the market like Altria, they could have fostered a more competitive market. They claim that there was a quid pro quo, that Altria took its MarkTen off the market in order to do the deal with Juul, and that was anti-competitive, that resulted in monopolistic behavior. Of course, Altria is arguing exactly what you’re saying right now. They are currently before the FTC. All of their executives are being interviewed, they’re testifying, and that’s exactly their argument, that this was a product that was so bad it had no future, it was the shittiest product on the market.

I mean, it’s a hilarious argument for a big tobacco company to be making: “We were terrible at innovation. Our product was the worst and we sucked, and so we had to basically take the product off the market.” It’s a complicated issue. Like I said, the FTC will decide. The deal could be unwound and that would be something, for sure.

The structure of the deal is really strange. A lot of Juul employees just got huge amounts of cash and walked, which is not usually how these kinds of deals work. You get stock, you have a vesting period. There’s all this stuff that makes you stay after an acquisition, but it feels like a lot of Juul employees and investors got huge checks and bounced.

Yes, it was a highly unusual deal. The $12.8 billion that Altria paid for its stake was structured as a special dividend. What that meant was that none of the existing shareholders had to sell their stock. They just got a check for $12.8 billion. Some of that was distributed to employees, a billion dollars in bonuses paid out to employees depending on their tenure. Some of them got hundreds of thousands of dollars just as a special bonus. Others got more than $1 million. Of course, the largest beneficiaries of that deal were the board members and the founders. So the single largest shareholder at the time, Riaz Valani, made around $2.6 billion just like a windfall. Nick Pritzker, the Hyatt billionaire, he made $1.7 billion. Bowen and Monsees each got about $650 million.

It was highly unusual. Oftentimes, when you bring in that type of investment and that type of capital, you’ll use it either to pay down debt or to go to your company’s operations. This was just a chunk of money that was just divided up among them and they got that. So almost none of it went back into the company. In fact, none of it went back into the company. So yeah, it was a sweet deal for Juul, for sure.

It feels like Juul had so much leverage because it had a product people liked better than cigarettes it was able to just extract, for itself, a cashout. They basically sold the problem to Altria.

That’s the most amazing thing about this deal. The fact that Altria paid that amount of money is just reckless, in my opinion. It’s like everybody knew the company was coming under this regulatory scrutiny, that they had this lung issue that they had been entangled in, that they had been fingered as the single largest contributor to the youth epidemic. I mean, there were so many risks in investing in this company, but it was almost a byproduct of just sheer momentum and desperation that ended up in this $12.8 billion payout. Altria basically had its back up against the wall. Juul had them over a barrel. They were so desperate to have this product that they could sell, that would actually give them a foothold in the e-cigarette market, that they paid this huge sum of money. I think it was a terrible deal. I think everybody agrees it was a terrible deal except for Bowen, Monsees, Pritzker, Valani. They made out pretty well.

It feels like a really strange moment for the FDA, for public health officials to be talking about regulating various health and tech companies. Obviously, we came through the pandemic, the FDA and public health were politicized. There’s a lot of lack of trust in institutions. Smoking rates rose during the pandemic, which is one of the odder effects of a respiratory illness, I think. What happens next? How does this all come together?

It’s actually fascinating. The FDA is trying to carry out this long-term plan that began under Scott Gottlieb, but that had actually been talked about for decades. They call it the Tobacco Endgame. What that means is the FDA has decided that there’s a huge potential public health benefit in getting people off smoking cigarettes onto potentially less harmful products, like Juul. It’s so strange because the FDA had been going after Juul for so long and there’d been the whole explosion of the youth issue and how that just subsumed the agency. And now, as they talk about this plan that the FDA has — and it’s going to go through the regulatory process, it’s going to take years — but the plan is that they’re going to reduce nicotine in combustible cigarettes to non-addictive levels.

The idea being that, again, if there’s no nicotine or minimally addictive amounts of nicotine in cigarettes, people aren’t going to use them, so they can essentially get rid of the cigarette. That’s the FDA’s strategy to get rid of smoking. As part of that strategy, if there’s a category of people that can’t get the nicotine from their cigarettes, but they still very much want it, the FDA would like to have a suite of products available to the public that will give them their nicotine fix without being as deadly as a cigarette.

This has been an issue that Mitch Zeller, who is the head of the [FDA’s] Center for Tobacco Products, has been working on for decades. He’s written all kinds of articles and studies about it, literally dating back to the 1990s, and this whole idea of this harm reduction plan, that if you can just provide people with a less harmful alternative to cigarettes, then you could save a lot of lives. And it’s very much like what Adam and James talked about, the Juul co-founders, early on. If the FDA approves Juul or authorizes Juul to continue to be marketed, it could actually position Juul to be the product that smokers turn to, because they no longer have their nicotine in the cigarettes and they’re searching for something else. There are other products on the market that compete with Juul, but I think a lot of people agree that Juul remains the most popular and is one of the most effective nicotine delivery mechanisms out there.

So it’s just fascinating to me that the FDA, in carrying forward with this nicotine reduction plan, could actually be setting up Juul for a resurgence, another life, act two, however you want to say that.

I’ve noticed there’s a lot more nicotine replacement or nicotine delivery products in the market lately. Just at my local CVS, the shelf behind the counter of nicotine stuff has gotten bigger. There’s more flavors. There’s new kinds of lozenges. There’s more exciting kinds of gum. It seems like they’re becoming consumer products in a way that, I don’t know, Nicorette never thought of itself as a consumer product. Is that a shift that was precipitated by Juul? Or is that a new market opportunity created by the FDA?

I think there’s this realization that this is a huge market. The market for nicotine products is $800 billion globally. I mean, it’s a massive market, and that includes lozenges, patches, all of that, including e-cigarettes. I think this gets back to what we were talking about, the socio-cultural question about nicotine use in America. I think businesses realize that this is a market that is not going away. Even if people aren’t getting nicotine from their cigarettes, they’re going to continue looking for nicotine in other places, whether it’s through Juul, whether it’s through a lozenge, whether it’s through a patch, I think that we’re going to be a nation of nicotine users and nicotine addicts. I don’t see that changing anytime soon and I think businesses have recognized that there’s an opportunity.

Certainly, the advent of Juul thrust that market forward with maybe greater velocity, seeing just how much money can be made and seeing how popular it is, that type of thing. But certainly, as the FDA moves forward in reducing nicotine levels in cigarettes, that market is only going to continue to grow. I think that the industry is transforming from the tobacco industry to the nicotine industry. And so I think we’re going to see a lot of innovation in the nicotine industry and there’s going to be more nicotine products.

Do you think the FDA has changed its approach? I mean, we think about the FDA, at The Verge, as regulating health technology. Apple’s going to put another sensor on your watch. They’re going to make some claims about what it can do. The FDA should probably step in and verify those claims or prevent Apple from making those claims, or whatever it is.

On the flip side, there is the pandemic. It’s unavoidable that a bunch of public health mandates got deeply politicized and a lot of people in America are just like, “Don’t tell me what to do. I’m an adult, I’m going to take whatever risks I want to take, and that will be the end of it. Get out of my hair.” And those things seem like a collision course and the nexus of that collision is nicotine products.

This is one of the most politicized products in the world. You have the tobacco industry right now, as we speak, going to great lengths to try to influence the FDA to reeducate Americans about nicotine. Altria has told the FDA that they believe that some of the funding that they’ve been using on anti-vaping campaigns should also be used on teaching Americans that nicotine isn’t unhealthy. So the FDA is under huge pressure by the industry to go in this direction of harm reduction. And, of course, you have the anti-vaping people, the youth tobacco prevention people who want to see less of these products on the market because they continue to pose a threat to young people.

I think the FDA is in an impossible position. If they do not approve Juul, I think there’s going to be lawsuits all around. It would look terrible for the FDA to single-handedly put an American company out of business, which is what would happen if they don’t grant this regulatory authorization.

And at the same time, they would be removing from the market the exact type of product that the FDA is in a way endorsing or facilitating, when they say that we’re going to take nicotine levels down and we want Americans to use a less harmful alternative. So it’s a very complicated, controversial issue that has so many different facets to it that there’s absolutely all kinds of political pressure and lobbying going on right now.

Reading your book, looking at the history of the research and how it’s politicized, it seems like the cigarette companies just created a lot of noise in the research. They paid for a lot of studies. They said, “We can never really know this stuff.” It feels like there are echoes of it now, where you can pick a study and it says what you want it to say.

Is that a strategy that Juul is using now? Is that a strategy you see other companies using? It seems like the tobacco wars, as you call them, became the focal point for what we can actually twist science to say whatever we want it to say, or at least create confusion.

The way that the tobacco industry just obfuscated and lied and covered up scientific research, and at the same time paid scientists to generate studies that would support their conclusion — One of the reporters back in the 1990s called it the largest misinformation campaign in American business history. There was an extraordinary amount of lying and deceit by these tobacco companies. And I do think that’s causing a huge challenge for Juul right now.

One, because anything they put out is going to be immediately doubted as just being another study that’s been bought and paid for by the tobacco industry. It’s making it very hard for the company to come up with any credible science that people are actually going to take hook, line, and sinker.

There have been some issues recently where a public health journal that Juul essentially paid for published a series of studies. And there were all these disclaimers saying that these were people who worked at Juul, scientists at Juul, consultants who were hired by Juul. Literally the entire journal was articles written by people paid for or employed by Juul. And it caused a huge controversy in the public health community and among researchers and scientists who were saying, “Well, this is happening again.”

Now, Juul will say that these were legitimate studies that they did that deserve to be in this public health journal. But to me, what I found most fascinating is just the reaction to that, where immediately people jumped on that and said, “This is exactly like tobacco 2.0. They’re using the same tactics. They’re buying health journals and they’re engaging in those same types of tactics.”

A lot of the focus of the controversy and a lot of the focus in your book is that Juul’s marketing to teenagers, to influencers, to social media, created the crisis for itself, that they had an initial marketing plan and they hired a flashier marketing guy. And he was like, “We’re going all in.” New York City-cool, billboards with models, the whole deal. And that created the problem.

I actually went to the Juul launch party that you describe in a warehouse full of influencers and beautiful people taking selfies. The whole thing, literally, it was full of Juul vape. It was an incredible party. And I walked out with a Juul, and I was immediately addicted to a Juul. It was great. I hope my mom doesn’t listen to this. I have since quit.

Good for you.

Is the problem that it was just too cool? It’s such a weird aspect of this controversy, that one of the things that set Juul on the path of destruction was that it was perceived as cool, which is what every business person wants their product to be perceived as. Is the heart of the problem that they hired the wrong marketing guy and they chased “cool” instead of, I don’t know, being perceived as medicine or a back brace or something that would just never be as cool?

Absolutely. I think that is and was their biggest misstep. I think had they treated the product with the requisite care that an addictive product should have, then they would have been better off. Instead, they hired a marketing staff whose sole focus was making this product as flashy and attractive as possible. They treated it as a gadget, as the next-generation iPhone, and that it was a fashion accessory. They gave it to models on runways at the New York fashion show, so literally it was a fashion accessory, and they treated it like that.

And the way that the early ads had pictures of these young, beautiful people using the Juul, there was no mention of nicotine. There was no mention that this was an addictive product. It was just suddenly this cool thing that you had to have in your hip pocket or in your whatever, in your hand, if you wanted to be a trendsetter.

I do believe that that was their original sin. However, it also launched their product in a huge way. I think Juul likes to distance themselves from the “Vaporized” campaign and say, “Oh, the Vaporized campaign didn’t really work. And it wasn’t until later that the product took off.” But there is no doubt that the Vaporized campaign gave it this original cachet and that launched it onto Times Square billboards, that launched it into magazines.

And by the way, these were advertising tactics that the tobacco industry was literally banned from engaging in. They hired people who knew nothing about tobacco to do their marketing and who knew the most about how to make a brand pop, how to make a product be super desirable.

I have struggled with this one forever. If you make a product that 40-year-olds think is cool, it is likely that 20-year-olds will think it’s cool. And the real win of the Juul was the nicotine salts. There were lots of vapes at that time. They all had different kinds of designs, and maybe they weren’t designed by Yves Behar or whoever, but the reason the Juul won was because the product was more effective at delivering nicotine.

If an uglier product had been effective at delivering nicotine, it might well have won. And to me, I can’t unpack that in my brain. Yep, they did an Instagram campaign, but really at the end of the day, they made a product that was “good.” They made a product that was really good at delivering nicotine to people, and that’s the thing that made it successful, not a handful of billboards in Times Square.

I think certainly the design and form factor of their product made it successful in addition to the nicotine solution. But I think one thing that we haven’t really talked about is that not only did they use nicotine salts, but they had the highest amount of nicotine on the market. At the time, it was 5 percent nicotine. Well, it still is, but no other e-cigarette on the market had 5 percent. It was a huge amount of nicotine.

So I think you can’t really separate them out. It’s like, could they have made an ugly device that was cloistered somehow or that was not marketed, m1 and just put in a little box behind a CVS counter that looked like some sort of inhaler and would have been more like a medical device? I don’t know.

I was thinking about orthopedic shoes. Should they have made orthopedic shoes?

I really do think that if they had been focused on the adult smoker market, that they should have and probably would have chosen a different marketing campaign. I think that is clear. So whether or not the marketing campaign is the reason for the catastrophe that followed with kids using it, I think it’s undeniable. Of course, if you’re going to show up at a rave and there’s going to be a Juul container pop-up store there, they were absolutely designing it to be cool.

I think that there was another way that they could have done it that would have involved less flashy marketing and that would have been tailored toward adult smokers, which they claimed that it was. So I do think that the marketing played a role in it, for sure. And now whether or not there was the intent there, I think that’s a pretty big remaining question that is going to be litigated in courtrooms across the country, is whether or not they intended to market to kids.

Maybe they just intended to create a great product, just like Steve Jobs. Or maybe they intended to just do the best that they could. And I think that Adam and James did, actually. I think they just surrounded themselves with the wrong people. I think they made an error in judgment when they brought on Richard Mumby, [the chief marketing officer at Juul] and when they brought on other people whose sole goal was to make the product cool. I think that that was the wrong marketing strategy for them, and I think it backfired on them in a huge way.

Richard Mumby is the marketing guy.

Yes. He was ultimately the chief marketing officer at Juul.

Laid low by the wrong marketing guy, a cautionary tale for all of us.

You’ve said that you approached this book as a business book. That’s what got you interested in the entire story. We’re talking a lot about making markets, understanding markets, and governments constraining markets. Let’s end with a broad question. What is the biggest business lesson that you’ve taken away as you’ve looked into what happened to Juul?

I think it’s pretty clear to me that the biggest business lesson is you need to know who your customers are and you need to be responsible. I mean, it almost sounds cliche, but you can’t go out of the gate like a bull in a china shop. You have to approach the market responsibly and anticipate regulatory questions if you want to have long-term viability. Now, certainly people would argue that that’s not the way to go. No Silicon Valley entrepreneur or investor would get behind a company that was moving slowly, that was asking the FDA for permission. But I think in this instance, especially when you’re selling a highly addictive product, there just needed to be a higher level of care given to that particular product.

Juul was selling a highly addictive product and they treated it like an iPhone or a watch or some other gadget. I think that they should have recognized what they were selling instead of trying to make it be something that it isn’t. I mean, it’s both of those things, but I think that they should have had a higher level of care and I think that businesses probably could benefit from that. In the long run, I think that they realize that’s not the way that you grow fast. So I think that there’s a very big tension between those and I understand that, but I do think that Juul would have bought itself longevity had it not just crushed the market like it did.

Lauren, thank you for being on Decoder. It is a great book and out now. Tell people where they can go find it.

Thank you so much. It was great talking to you. You can buy my book anywhere books are sold. Your local bookstore would be the best option.

Source: The Verge

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