- Impact
- 11,515
August 5, 2004
BALERNA, Switzerland -- Gianpaolo and Carlo Messina were nobodies in tobacco four years ago when they set up Yesmoke.com, an online cigarette shop run out of a duty-free zone in the Swiss Alps. Today, the Italian brothers are grossing about $100 million (83 million) in annual sales and stoking the ire of both Big Tobacco and the Big Apple.
Their largest market is the U.S., where their mail-order Marlboros, Camels and Lucky Strikes, costing as little as $14 per 10-pack carton, are winning over smokers fed up with paying $7 or more for a pack of heavily taxed U.S. smokes. In New York, where Mayor Michael Bloomberg has cracked down on smoking with bans and tax increases, a carton of Marlboros costs upward of $70. Now the cigarette industry and the city are trying to snuff out the Messinas' business model.
Philip Morris USA, a unit of Altria Group, is challenging Yesmoke.com's parent company, Otamedia SA, in two lawsuits filed in U.S. District Court in New York's southern district. The initial suit alleges that Otamedia engaged in unfair business practices and trademark infringement; Otamedia ignored the suit, and in 2003 the court ruled against it in a default judgment. A claim for $395 million in damages is pending. In the second suit, Philip Morris is seeking ownership of the yesmoke.com domain name, claiming there is no other way to stop Otamedia except to block its Internet address. A ruling in that case is expected this summer.
Currently, visitors to Yesmoke.com are redirected to a Swiss site, Yesmoke.ch. Meanwhile, yet a third suit, filed in the southern federal district by the city of New York, seeks $17 million in back taxes from Otamedia and alleged affiliates on sales to New Yorkers.
Gianpaolo Messina, 44 years old, says the $395 million suit both stunned and pleased him. "It put us in pole position" among online cigarette sellers, referring to the preferred place in auto racing. At Yesmoke.com's logistics base in Balerna, a small town near the Italian border, workers in blue polo shirts use wireless hand-held devices to coordinate the outfit's core business: repackaging Marlboros and other brand-name smokes and mailing them to customers around the world.
The online cigarette business is creating a rare meeting of minds among tobacco companies, politicians and antismoking activists. There are now hundreds of online cigarette vendors whose sales threaten to eat into tax revenue and sales of conventional tobacco merchants. Anyone with a credit card can buy cigarettes online from sites like Yesmoke.com, making it hard to enforce bans on smoking by minors.
Online smoke shops based in the U.S. have attracted lawmakers' scrutiny by shipping cigarettes from low-tax states to high-tax ones. The House is reviewing an amendment to the Jenkins Act, which regulates mail-order trade, to include interstate online shopping. If signed into law, the measure would make it easier to prevent U.S. cigarette sites from circumnavigating taxes. But it isn't clear whether lawmakers can stop foreign online outfits from selling cigarettes in the U.S.
The Messinas say that because they have no operations located in the U.S., they aren't subject to U.S. law. And in their view, they aren't doing anything wrong under Swiss law, merely exporting cigarettes. The customer is the importer, and in the case of U.S. customers, they are the ones who risk breaking U.S. law.
Philip Morris and New York City may indeed have a hard time proving the company has broken U.S. laws, says Fariborz Ghadar, professor of global management at Pennsylvania State University, University Park, Pa. Yesmoke.com "caused damage, but they didn't do it illegally," says Prof. Ghadar, who has studied the issue.
The litigation doesn't seem to have slowed Otamedia so far. The company claims to be the largest online cigarette vendor. Operating under the name Yespeedy Ltd., the Messinas say they quadrupled their revenue to $80 million in the fiscal year ended in August 2003 and expect to bring in well above $100 million this fiscal year. "We will at least double every year in the next four or five years," says Carlo Messina, age 40.
To lure buyers, Yesmoke.com's "metatag" -- its invisible string of key words programmed into its Web page -- lists "Marlboro," "Camel" and other brands, as well as "cigarettes," "online" and "duty-free." People using Internet search engines to search those terms often will be directed to Yesmoke.com. The Web site also features a Marlboro Man-type mascot wearing Swiss Alpine gear. Philip Morris complains about these tactics in its lawsuit.
Customers pay $2 a carton in shipping and handling fees. Yesmoke.com then ships orders in unmarked packages that can -- and frequently do -- pass for books or other noncigarette items at U.S. customs.
The Web site gives customers hazy information about the legalities: "Buying cigarettes by international mail is legal, as long as it is carried out in accordance with international postal regulations and standards," it says, omitting an important caveat for U.S. buyers: importing U.S. cigarette brands into the U.S. is illegal.
"No American-brand cigarettes are allowed in whatsoever," says Barry Braverman, field national import specialist for the U.S. Customs Service at JFK International Airport. But customs officials, occupied with intercepting drugs and terrorism-related objects, don't consider illegal cigarette shipments a top priority, he says.
If buying foreign brands, U.S. buyers are supposed to pay tariffs of $1.05 per kilogram, plus 2.3%, as well as U.S., state and city taxes. Taxes alone add up to $3.39 per pack in New York City, for example. But few customers of Yesmoke.com report their purchases after the fact and pay the tax. In practice, U.S. buyers often find they can import a few cartons of Marlboros or other brands without a hitch -- and without paying a dime in duty or taxes.
Still, the Web site advises, "The Customer must be aware of the legislation in his country." And for buyers whose shipments get nailed at customs, the Web suggests a possible course of action: "Reject the parcel which will be returned to us and ask for your money back. See also 100% Money Back Guarantee."
The secret to Yespeedy's low costs are its suppliers on what Carlo Messina calls the "parallel market," including duty-free airport retailers and clearinghouses. He says Yespeedy buys leftover cigarettes in bulk from the duty-free chains and a Dutch clearinghouse. (The cigarettes aren't stale, he says.) The cigarettes arrive at and leave from Yespeedy's logistics center in a duty-free customs haven in Balerna, along the rail line connecting Milan and Zurich. Yespeedy doesn't pay Swiss taxes or customs because its cigarettes never formally enter Switzerland.
Yespeedy can get "master cases," each containing 500 packs of cigarettes, for $350 to $400, or 70 to 80 cents per pack, Carlo Messina says. "That allows me to sell Marlboros for $1.50 a pack and still make a profit," even after repackaging. Yespeedy sometimes gets cigarettes directly from a Philip Morris factory in the Philippines, where production far exceeds demand in the country, Carlo Messina adds. The factory sells the surplus at a deep discount, he says.
Philip Morris officials deny that their own factories supply Yespeedy. Yespeedy's cigarettes "are probably counterfeit versions," says David Davies, senior vice president of corporate affairs at Philip Morris International. Mr. Davies insists that all factories are tightly monitored, so overproduction is negligible.
But there is evidence that cigarettes do spill into the gray market. The European Union accused Philip Morris of complicity in smuggling by intentionally overproducing cigarettes in some European countries. In a recent settlement, Philip Morris agreed to pay $1.25 billion over 12 years and the charges were dropped, as part of a large antismuggling pact with the EU.
Philip Morris has gone after other Internet cigarette vendors with mixed results. It says it has initiated 20 lawsuits in seven federal courts against 67 owners and operators of online smoke shops. It has won judgments against the operators of four Web sites registered in Panama City, Panama, including Discount-Marlboro-Cigarettes.com and Allsmoke.com.
Earlier this year, a U.S. district court in Los Angeles ruled against the four sites and awarded the tobacco giant some $9 million in damages and fees and gave it the rights to their Internet domain names. Discount-Marlboro-Cigarettes closed down; Allsmoke relocated to a Russian Web server and now is selling Marlboros at Allsmoke.ru.
The Yesmoke case has prompted its own cat-and-mouse moves. Last year, in August, Yesmoke's cigarette-packaging staff opened a box of L&M cigarettes and discovered a jumble of wires and electronics. Thinking it was a bomb, many ran out of the area, Carlo Messina says. Five more wired boxes arrived at the Balerna site. They weren't bombs but tracking devices planted by Philip Morris, which wanted to find out how Yesmoke.com was getting its cut-rate smokes.
"We got word that one of our distributors in Eastern Europe was selling cigarettes on the gray market," says Christopher Michie, a corporate lawyer for Philip Morris, who was involved in the operation and acknowledges that the company sent multiple devices. Philip Morris severed its contract with the distributor, Mr. Michie says.
Meanwhile, the company's battle with Yespeedy continues. Even if Philip Morris wrests control of the domain name, Carlo Messina says, Yesmoke will continue operating under the Swiss Yesmoke.ch address. Yesmoke.com has automatically forwarded visitors there for almost a year now.
"While you put the effort into closing down one Web site, 50 others will pop up," Carlo Messina says.
Bill Williams, founder of the prosmoking Internet community Smokinglobby.com, started ordering from Yesmoke four years ago. Mr. Williams, who smokes about four cartons of Camel Lights a month, says the site is "blatantly trying to steal from Philip Morris." But he says his purchases are civil disobedience against "taxation without representation." He adds, "The only reason I buy from them is that our government needs to be taught a lesson."
BALERNA, Switzerland -- Gianpaolo and Carlo Messina were nobodies in tobacco four years ago when they set up Yesmoke.com, an online cigarette shop run out of a duty-free zone in the Swiss Alps. Today, the Italian brothers are grossing about $100 million (83 million) in annual sales and stoking the ire of both Big Tobacco and the Big Apple.
Their largest market is the U.S., where their mail-order Marlboros, Camels and Lucky Strikes, costing as little as $14 per 10-pack carton, are winning over smokers fed up with paying $7 or more for a pack of heavily taxed U.S. smokes. In New York, where Mayor Michael Bloomberg has cracked down on smoking with bans and tax increases, a carton of Marlboros costs upward of $70. Now the cigarette industry and the city are trying to snuff out the Messinas' business model.
Philip Morris USA, a unit of Altria Group, is challenging Yesmoke.com's parent company, Otamedia SA, in two lawsuits filed in U.S. District Court in New York's southern district. The initial suit alleges that Otamedia engaged in unfair business practices and trademark infringement; Otamedia ignored the suit, and in 2003 the court ruled against it in a default judgment. A claim for $395 million in damages is pending. In the second suit, Philip Morris is seeking ownership of the yesmoke.com domain name, claiming there is no other way to stop Otamedia except to block its Internet address. A ruling in that case is expected this summer.
Currently, visitors to Yesmoke.com are redirected to a Swiss site, Yesmoke.ch. Meanwhile, yet a third suit, filed in the southern federal district by the city of New York, seeks $17 million in back taxes from Otamedia and alleged affiliates on sales to New Yorkers.
Gianpaolo Messina, 44 years old, says the $395 million suit both stunned and pleased him. "It put us in pole position" among online cigarette sellers, referring to the preferred place in auto racing. At Yesmoke.com's logistics base in Balerna, a small town near the Italian border, workers in blue polo shirts use wireless hand-held devices to coordinate the outfit's core business: repackaging Marlboros and other brand-name smokes and mailing them to customers around the world.
The online cigarette business is creating a rare meeting of minds among tobacco companies, politicians and antismoking activists. There are now hundreds of online cigarette vendors whose sales threaten to eat into tax revenue and sales of conventional tobacco merchants. Anyone with a credit card can buy cigarettes online from sites like Yesmoke.com, making it hard to enforce bans on smoking by minors.
Online smoke shops based in the U.S. have attracted lawmakers' scrutiny by shipping cigarettes from low-tax states to high-tax ones. The House is reviewing an amendment to the Jenkins Act, which regulates mail-order trade, to include interstate online shopping. If signed into law, the measure would make it easier to prevent U.S. cigarette sites from circumnavigating taxes. But it isn't clear whether lawmakers can stop foreign online outfits from selling cigarettes in the U.S.
The Messinas say that because they have no operations located in the U.S., they aren't subject to U.S. law. And in their view, they aren't doing anything wrong under Swiss law, merely exporting cigarettes. The customer is the importer, and in the case of U.S. customers, they are the ones who risk breaking U.S. law.
Philip Morris and New York City may indeed have a hard time proving the company has broken U.S. laws, says Fariborz Ghadar, professor of global management at Pennsylvania State University, University Park, Pa. Yesmoke.com "caused damage, but they didn't do it illegally," says Prof. Ghadar, who has studied the issue.
The litigation doesn't seem to have slowed Otamedia so far. The company claims to be the largest online cigarette vendor. Operating under the name Yespeedy Ltd., the Messinas say they quadrupled their revenue to $80 million in the fiscal year ended in August 2003 and expect to bring in well above $100 million this fiscal year. "We will at least double every year in the next four or five years," says Carlo Messina, age 40.
To lure buyers, Yesmoke.com's "metatag" -- its invisible string of key words programmed into its Web page -- lists "Marlboro," "Camel" and other brands, as well as "cigarettes," "online" and "duty-free." People using Internet search engines to search those terms often will be directed to Yesmoke.com. The Web site also features a Marlboro Man-type mascot wearing Swiss Alpine gear. Philip Morris complains about these tactics in its lawsuit.
Customers pay $2 a carton in shipping and handling fees. Yesmoke.com then ships orders in unmarked packages that can -- and frequently do -- pass for books or other noncigarette items at U.S. customs.
The Web site gives customers hazy information about the legalities: "Buying cigarettes by international mail is legal, as long as it is carried out in accordance with international postal regulations and standards," it says, omitting an important caveat for U.S. buyers: importing U.S. cigarette brands into the U.S. is illegal.
"No American-brand cigarettes are allowed in whatsoever," says Barry Braverman, field national import specialist for the U.S. Customs Service at JFK International Airport. But customs officials, occupied with intercepting drugs and terrorism-related objects, don't consider illegal cigarette shipments a top priority, he says.
If buying foreign brands, U.S. buyers are supposed to pay tariffs of $1.05 per kilogram, plus 2.3%, as well as U.S., state and city taxes. Taxes alone add up to $3.39 per pack in New York City, for example. But few customers of Yesmoke.com report their purchases after the fact and pay the tax. In practice, U.S. buyers often find they can import a few cartons of Marlboros or other brands without a hitch -- and without paying a dime in duty or taxes.
Still, the Web site advises, "The Customer must be aware of the legislation in his country." And for buyers whose shipments get nailed at customs, the Web suggests a possible course of action: "Reject the parcel which will be returned to us and ask for your money back. See also 100% Money Back Guarantee."
The secret to Yespeedy's low costs are its suppliers on what Carlo Messina calls the "parallel market," including duty-free airport retailers and clearinghouses. He says Yespeedy buys leftover cigarettes in bulk from the duty-free chains and a Dutch clearinghouse. (The cigarettes aren't stale, he says.) The cigarettes arrive at and leave from Yespeedy's logistics center in a duty-free customs haven in Balerna, along the rail line connecting Milan and Zurich. Yespeedy doesn't pay Swiss taxes or customs because its cigarettes never formally enter Switzerland.
Yespeedy can get "master cases," each containing 500 packs of cigarettes, for $350 to $400, or 70 to 80 cents per pack, Carlo Messina says. "That allows me to sell Marlboros for $1.50 a pack and still make a profit," even after repackaging. Yespeedy sometimes gets cigarettes directly from a Philip Morris factory in the Philippines, where production far exceeds demand in the country, Carlo Messina adds. The factory sells the surplus at a deep discount, he says.
Philip Morris officials deny that their own factories supply Yespeedy. Yespeedy's cigarettes "are probably counterfeit versions," says David Davies, senior vice president of corporate affairs at Philip Morris International. Mr. Davies insists that all factories are tightly monitored, so overproduction is negligible.
But there is evidence that cigarettes do spill into the gray market. The European Union accused Philip Morris of complicity in smuggling by intentionally overproducing cigarettes in some European countries. In a recent settlement, Philip Morris agreed to pay $1.25 billion over 12 years and the charges were dropped, as part of a large antismuggling pact with the EU.
Philip Morris has gone after other Internet cigarette vendors with mixed results. It says it has initiated 20 lawsuits in seven federal courts against 67 owners and operators of online smoke shops. It has won judgments against the operators of four Web sites registered in Panama City, Panama, including Discount-Marlboro-Cigarettes.com and Allsmoke.com.
Earlier this year, a U.S. district court in Los Angeles ruled against the four sites and awarded the tobacco giant some $9 million in damages and fees and gave it the rights to their Internet domain names. Discount-Marlboro-Cigarettes closed down; Allsmoke relocated to a Russian Web server and now is selling Marlboros at Allsmoke.ru.
The Yesmoke case has prompted its own cat-and-mouse moves. Last year, in August, Yesmoke's cigarette-packaging staff opened a box of L&M cigarettes and discovered a jumble of wires and electronics. Thinking it was a bomb, many ran out of the area, Carlo Messina says. Five more wired boxes arrived at the Balerna site. They weren't bombs but tracking devices planted by Philip Morris, which wanted to find out how Yesmoke.com was getting its cut-rate smokes.
"We got word that one of our distributors in Eastern Europe was selling cigarettes on the gray market," says Christopher Michie, a corporate lawyer for Philip Morris, who was involved in the operation and acknowledges that the company sent multiple devices. Philip Morris severed its contract with the distributor, Mr. Michie says.
Meanwhile, the company's battle with Yespeedy continues. Even if Philip Morris wrests control of the domain name, Carlo Messina says, Yesmoke will continue operating under the Swiss Yesmoke.ch address. Yesmoke.com has automatically forwarded visitors there for almost a year now.
"While you put the effort into closing down one Web site, 50 others will pop up," Carlo Messina says.
Bill Williams, founder of the prosmoking Internet community Smokinglobby.com, started ordering from Yesmoke four years ago. Mr. Williams, who smokes about four cartons of Camel Lights a month, says the site is "blatantly trying to steal from Philip Morris." But he says his purchases are civil disobedience against "taxation without representation." He adds, "The only reason I buy from them is that our government needs to be taught a lesson."
