There's no question that The Walt Disney Company's (DIS -1.01%) launch of Disney+ has been an astounding success. The timing of the release, November of 2019, was arguably the best timing of any product launch in history. In the months following the release, the world fell into a global pandemic that kept people indoors and created a surge in demand for at-home entertainment.
That said, the pandemic tailwind is fading as economies are reopening. To help spur subscriber growth, Disney announced an ad-supported version of Disney+ later this year. The announcement generated both positive and negative opinions about the implications of the prospects for Disney+. Let's look at each side of the argument.
Image source: Getty Images.
The bull case
As of Jan. 1, Disney+ boasted 130 million subscribers, up from 95 million at the same time the prior year. Releasing a lower-priced, ad-supported tier will undoubtedly help grow those figures larger. Some folks who were interested in buying the service, but hesitated because of price, may finally decide to join.
The ad-supported tier will launch later in 2022 in the U.S. "Expanding access to Disney+ to a broader audience at a lower price point is a win for everyone--consumers, advertisers, and our storytellers," said Kareem Daniel, chairman of Disney Media and Entertainment Distribution. International launch of the ad-supported tier will follow in 2023.
The latter will likely be vital in unlocking subscriber growth. Disney+ is available in countries with wide disparities in per-capita income. The lower-income countries will benefit the most from a lower-priced version of Disney+.
The company closed the announcement by stating the ad-supported tier is viewed as a building block to achieving its long-term target of 230 million to 260 million Disney+ subscribers by fiscal year 2024.
The bear argument
The bear argument centers on Disney's long-term target. Investors use that target to estimate the company's streaming service revenue and the implications for the stock's valuation. If Disney were to lower its estimate of 230 million to 260 million subscribers by 2024, the stock price would likely take a significant step downward.
Since its growth trends in Disney+ subscribers are behind the pace needed to reach 230 million by 2024, management is coming closer to the reality of missing the target. Bears will argue that rather than come clean to investors, management decided to add an ad-supported tier to spur signups. Of course, lowering the price of any product or service will increase the demand to some degree. The problem is that while it may increase subscribers, it may not increase overall revenue.
In contrast, it would have been a clear, positive signal if Disney had announced the ad-supported tier and raised its 2024 target for subscriber totals. That way, investors would have viewed the move as creating higher incremental demand than previously expected instead of an admission that organic demand for the service at the current price points is not enough to reach the target.
So far, the bears are winning the argument as the stock has been down nearly 5% since making the announcement on March 4.
