One of the major selling points for electronic cigarettes, or e-cigarettes, is that they are effective smoking-cessation devices. Altria Group (NYSE:MO), Reynolds American (NYSE:RAI), and Lorillard (UNKNOWN:LO.DL) have made bets that smokers will switch to e-cigarettes as a healthier alternative to traditional cigarettes. However, that thesis may have just gone up in smoke, as new research suggests that e-cigarettes are not an effective smoking-cessation device.

Questions about e-cigarettes' effectiveness
The study, published in JAMA Internal Medicine, followed a nationwide sample of 1,549 participants for one year. It discovered that e-cigarette use did not result in a change in cigarette consumption.

This is mixed news for the tobacco industry, which is threatened by the potential for e-cigarettes to become an effective substitute for traditional cigarettes. However, Altria, Reynolds, and Lorillard are also positioned to reap the majority of the benefits from the e-cigarette boom. Lorillard acquired e-cigarette leader Blu in 2012 for $135 millon; it now has a nearly 50% market share. Reynolds and Altria are also rolling out e-cigarette brands nationwide this year.

Big tobacco's move into the e-cigarette market is as much a defensive stance as an attempt to boost profitability. Respected tobacco analyst Bonnie Herzog predicts that U.S. e-cigarette consumption will surpass that of traditional cigarette consumption within the next 10 years. Since much of the growth in e-cigarettes comes at the expense of traditional cigarettes, tobacco companies are merely playing defense.

However, there is widespread fear among anti-tobacco activists that e-cigarettes could make smoking cool again and serve as a gateway to cigarettes. A study published in JAMA Pediatrics found that e-cigarettes contributed to teenage nicotine addiction. E-cigarettes, which come in flavors like cherry, strawberry, and cookies & cream, are less harsh than cigarettes, making it easier for adventurous teenagers to pick up the habit. Moreover, the study showed that current smokers who had never used e-cigarettes were more determined to quit than those who had used e-cigarettes. Although scientists are far from reaching a consensus on the issue, these findings could put a damper on e-cigarette growth.

The Food and Drug Administration has not yet released comprehensive guidelines for e-cigarette regulation, but many states and municipalities are already clamping down on the tobacco-free devices. Bills in New York, Oregon, New Jersey, Washington, and a number of other states have proposed taxing and regulating e-cigarettes like other tobacco products. High taxes, marketing restrictions, and public awareness about the health risks associated with smoking tobacco have led to a long-term secular decline in cigarette consumption in the U.S. The same factors could put a lid on e-cigarette growth.

What it means for tobacco companies
Altria has the most to lose from e-cigarette growth. It was the last of the big three U.S. tobacco companies to announce a nationwide rollout of its e-cigarette brand, and its 50% share of the U.S. cigarette market gives it a dominant share of the industry's profits. Stunted e-cigarette growth would reaffirm Altria's dominant position in the industry.

Reynolds is in the same boat as Altria. Its Vuse e-cigarette has yet to gain wide adoption, while its Camel and Pall Mall brands combine for a 17.8% share of the cigarette market. All of the company's brands combine for a 26% share of the cigarette market.

Lorillard, on the other hand, could stand to gain another revenue source. Its revenue is largely dependent on Newport menthol cigarettes; Newport (mentholated and non-mentholated) accounts for 85% of Lorillard's cigarette volume. Given pending legislative restrictions on menthol cigarettes, Lorillard's small-but-growing e-cigarette business is an important source of diversification.

Takeaway
Nobody knows how e-cigarettes will be regulated; the rules have yet to be drawn up. However, Altria and Reynolds would not mind it if e-cigarettes were lumped in with tobacco products; the two leading tobacco companies have a lot more to lose from e-cigarette growth than they could hope to gain. Lorillard, on the other hand, stands to gain a meaningful new source of revenue if it can maintain a dominant share of a growing e-cigarette market. It is too early to tell which way regulators will go, so tobacco-industry investors must accept a high degree of uncertainty for the time being.