Now the bigger players are moving in. Last year, Lorillard paid $135 million to buy Blu, and RJ Reynolds is creating its own product in house.
"We will be in this category in 2013," said RJ Reynolds spokesman David Howard. "We have very big plans."
Wells Fargo's Herzog cautions that the products could eventually be regulated by the U.S. Food and Drug Administration, as some critics are concerned that even e-cigarettes could carry health risks. Also, the products are expensive. One e-cigarette from Njoy bought at a California 7-11 convenience store cost almost $9, but it claims to be the equivalent of two packs. Herzog believes e-cigarettes could eventually provide tobacco companies with better margins, though. For one thing, they won't be subject to the government's big tobacco settlement. They also won't be subject to tobacco taxes, though Minnesota is taxing the products because they contain nicotine.
"E-cigarettes to tobacco is like the energy category to beverages," Herzog said.
The product is gaining traction, she said, as smokers trying e-cigarettes once are coming back to try them again, and they're gaining shelf space in convenience stores. "Not just one brand, but two and three brands," she said.
John Cameron said the product remains a work in progress.
"We have some ways to go, but I think that will be a very short period of development," he said. "This is not a cigarette we're talking about. This is an application driven, software and hardware interface, coupled with something I consume."
As he puffed on one inside the Vampire Lounge in Beverly Hills, Calif., Cameron said he welcomes competition from Big Tobacco. "We need them," he said. "They know how to sell cigarettes like nobody else ... we have the technology that has the potential to literally save six million lives a year."
—By CNBC's Jane Wells; Follow her on Twitter
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