Tobacco maker, PeoplePC target smokers

R.J. Reynolds, the No. 2 U.S. cigarette maker, launched a Web site at Smokerswelcome.com in late October for Doral customers. At the same time, in partnership with subsidized-computer merchant PeoplePC, the company began an unannounced promotion that lets Doral smokers buy a Hewlett-Packard PC, at $21.95 per month for 48 months, with free Net access for a year.

The deal comes as some cigarette makers--among the biggest advertisers in the world--are expanding their presence online as they face growing restrictions in traditional media such as TV, print and billboards. Although the Web carries its own regulatory baggage, a handful of companies have recently beefed up their online efforts: R.J. Reynolds has been testing Web sales of its Eclipse brand, and at least one other major cigarette maker, Brown & Williamson, is considering selling its regular brands online.

The trend worries anti-tobacco advocates, who see the Internet as a major new front in their battle against underage smoking.

Although online tobacco advertising has been relatively light to date, cybersales of cigarettes have been brisk. And with the downturn in Web advertising this year, mainstream publishers already have turned to "sin" products such as gambling and hard liquor to bolster revenues.

"We are concerned it's the new wave of where kids will go to get cigarettes," said Eric Lindblom, a lawyer at the Campaign for Tobacco-Free Kids, which supports a ban on Internet cigarette sales. "So far, the big companies have not used the Internet to an enormous extent for marketing. But if they did, we would be extremely suspicious that it would be a tool to sell their products" to children.

The big four cigarette makers, including Philip Morris, Brown & Williamson and Lorillard Tobacco, collectively spend $22.5 million a day promoting their brands, according to the Federal Trade Commission. But they have restricted their marketing and sales efforts online partly to avoid legal minefields around age verification and tax issues.

Philip Morris, the No. 1 U.S. cigarette maker, has said that it would not advertise or sell cigarettes directly via the Web, a stance representatives reiterated in an interview last week.

The lure of the Net
Nevertheless, tough tobacco marketing limits appear to be tempting companies like R.J. Reynolds and Brown & Williamson to seek alternative outlets, including the Internet. Cigarette advertising in traditional media such as TV, radio and billboards is restricted by federal laws and by a pact between the major cigarette makers and state attorneys general that ended a multibillion-dollar class-action lawsuit in 1998.

Perhaps more of a factor than these restrictions, though, is the fact that cigarette sales are booming at a host of small Web retailers. According to the April edition of industry trade journal Tobacco Reporter, Internet sales are expected to reach $10 billion a year, or about 20 percent of the total U.S. market within the next five years.

That trend has already led to a backlash among some lawmakers, who are busy trying to establish regulations online that would restrict sales to minors. This month, Rep. Marty Meehan, D-Mass., introduced a bill called the Tobacco Free Internet for Kids Act, which would require Internet retailers to verify the age of their customers using government ID checked against related databases, along with signature and age-verification upon delivery, among other measures.

The bill would also require tobacco advertisers to include a "hazardous to your health" warning label in online ads and restrict companies who do not comply with ID standards from advertising online.

Despite such worries over the Web's influence on youth smoking, R.J. Reynolds spokeswoman Cassandra Foust said the company stands by its online marketing and sales practices. She added that the company believes its Doral PC program is in compliance with current tobacco advertising rules.

Since October, Foust said, the company has solicited adult Doral smokers to sign up for the service through a members-only Web site and via direct mail, ensuring that minors are not targeted. The company would not disclose financial details or the number of sign-ups for the program.

"This Web site has strict controls to limit access to smokers 21 years of age and older," she said. "We thought this offer would be a great tool for smokers to have access to a computer at an affordable price."

Bread and butts for PeoplePC?
For PeoplePC, meanwhile, partnering with a tobacco maker means additional income at a time when new deals are scarce.

In October, PeoplePC lost Ford as a customer for subsidized computer sales to Ford employees. It also narrowly escaped delisting from the Nasdaq when the stock market set aside its $1 minimum bid price requirement. In November, Softbank Capital Partners invested more than $20 million to become a majority owner in the company.

"This is one of the first corporations that we're working with where we're helping them wire their customer base," said Nick Grouf, CEO of PeoplePC, whose customers include AAA and Blue Cross Blue Shield.

R.J. Reynolds "is looking for ways to communicate more effectively and cost-efficiently with customers. The first step is ensuring that the people are connected to the Internet," Grouf said.

Under the 1998 tobacco settlement, cigarette makers agreed to restrictions on advertising to minors, giving out free samples, promoting brands on billboards and sponsoring multiple events at once, among other limits. Part of the restriction on advertising to minors included a ban on using cartoon characters in marketing--a rule that snuffed out Joe Camel.

It is unclear how far that agreement limits online marketing. The so-called Masters Settlement Agreement does not outline rules for the Internet or for such other venues as overseas markets or print publications.

Enforcement officials said the agreement in theory could be extended to cover online marketing. Provisions in the pact prevent tobacco companies from attaching their brand name to any merchandise, for example, and limit cigarette marketers to sponsoring one event per year with a brand-name cigarette. Those restrictions would apply on the Net as well as to traditional media, said Dennis Eckhart, the head of California's tobacco litigation and enforcement division.

"The agreement itself does not mention advertising, sales or marketing over the Internet," he said. "But that doesn't mean that provisions in the pact couldn't restrict what they do on the Internet."

The digital pitch
If history is a reliable guide, the tobacco industry may decide to fight any interpretation that significantly limits its online activities. And, despite some high-profile setbacks, Big Tobacco continues to successfully challenge new advertising restrictions on many fronts.

This summer, for example, the industry succeeded in overturning a Massachusetts state law banning tobacco billboard advertising near schools after the case was appealed to the U.S. Supreme Court. In addition, the World Health Organization put off until next year consideration of a measure that would ban cross-border tobacco advertising--a measure that, if adopted, would dramatically chill online cigarette marketing.

The scope and interpretation of the 1998 national tobacco pact has also sparked confrontation. In a dispute that has yet to be resolved, California Attorney General Bill Lockyer last summer filed two lawsuits that charge R.J. Reynolds with violating key provisions in the settlement restricting advertising aimed at children. The suit claims that the company, whose top-selling cigarette brands include Camel, Winston and Salem, has boosted its advertising in youth-oriented magazines since the settlement.

Against that backdrop, anti-smoking advocates say they are bracing for a fight over Net advertising, pointing to the Doral PC program as an example of the many guises such marketing can take.

Lindblom of Tobacco Free Kids said he would be particularly concerned that tobacco companies could get more detailed information about customers' habits through click-stream data obtained by Internet access providers. In the worst case, cigarette companies could use e-mail to communicate with smokers trying to quit, he said.

PeoplePC's Grouf said the company does not track the habits of customers through the ISP service, nor is the service branded by Doral. Still, the PeoplePC deal will help R.J. Reynolds test the waters of online marketing by establishing a digital relationship with customers.

"As the cigarette companies have been restricted in marketing, one type of marketing they have gone back to is direct marketing. If they got into Internet access, they would have an enormous database for e-mail marketing," Lindblom said. "There are all sorts of aspects about Internet sales, privacy concerns and manipulation concerns, where they could use Internet sales as a way to track their customers and prevent them from quitting."