Good afternoon, welcome to the Netflix Q2 2020 earnings interview. I'm Spencer Wang, VP of IR and Corporate Development. Joining me today are co-CEOs Reed Hastings and Ted Sarandos, COO Greg Peters, and CFO Spence Neumann. Our interviewer this quarter is Kannan Venkateshwar from Barclays Capital. As a reminder, we'll be making forward-looking statements and actual results may vary. Now let me turn it over to Kannan for his first question.
Thank you, Spencer, and you nailed my last name, so congratulations for that.
I practiced.
Good. Thanks for having me here, and I guess the best place to start here is Ted and Greg, congratulations on your new role. Reed, you too. I guess you can relax a little bit more. Maybe we could just start off with your priorities, Ted, and maybe followed by Greg, just in terms of how you see the world evolving, what your priorities are, and of course, we are in the middle of a lot of change, how you see the world. Maybe you could just start there.
Well, we should start by saying that the chances that Reed's going to relax a little more are very low. Everyone should know that Reed and I have worked together for more than 20 years. He's been an unbelievable role model and source of inspiration for me. We've navigated some of the toughest decisions the company has made over those years, from mailing DVDs around the U.S. to streaming around the world, and my focus is to continue the successful trend we've been on for the next 200 million subs around the world. Greg, I'm thrilled to throw it over to you.
Thank you, Ted. From my perspective, when I think about what our future is, and I think it's just a tremendous next stage of growth that we will see mostly coming from outside the United States. Think of more and more employees outside the United States, more productions, more operations happening outside the U.S., and hopefully many, many more members outside the U.S. This is an opportunity to lean in just a little bit more, be proactive, and drive a little bit more alignment across those activities where we think alignment will benefit the business and push the optimization of those activities a little bit more.
Kannan, you might not know, but many years ago now it feels, I was able to spend a couple years in Japan launching the service there, and I got a chance to work with the local teams that we were hiring and growing there, as well as our global teams, to really look at every aspect of the service and try and improve it for our Japanese members and grow our membership base there. I think of that as sort of like a mini version.
Like a trial or a test out for what I anticipate I'll be doing more in this role.
Just as a small little fun fact for our listeners and shareholders who may not know, Greg actually speaks five languages. I think as we become a more global service, that skill set will really benefit the company.
Notice he didn't say how well.
Java, C++ He didn't make C++ languages. How do you find time, Greg, to do all that? It's pretty amazing. We are so excited about the next decade of Netflix growth. We've definitely had a good start, the opportunity across the next decade is just amazing for us. It's a lot international, as Greg was referring, I couldn't be more excited about it will be great to have some help as we expand the globe, I'm looking forward to that. To be totally clear, I'm in for a decade. Let me be really clear on that. I'm in for a decade. Okay. As co-CEO, it's two of us full time. It's not like a part-time deal. It's definitely broadening the management team and helping us grow even faster over the next 10 years.
That's great. Maybe, Reed, from your perspective, now that you have a relatively new setup, is there any kind of growth plans, maybe that's out of the ordinary, that you might be thinking about in Netflix in the next 10 years, the same that compared to the Netflix in the last 10 years? If you could just help us think through what your priorities are potentially now that you're sharing a job with Ted.
The three of us have been working together so long, there's essentially no difference next quarter. Ted's got some increased external stature. He can put bigger deals together for us. That's really cool. Greg will start to spend more time around the world for us. Think of it as much more consistent with the past than different. The beautiful thing about the next 10 years is we've got a good model. We just need to make it better. Every day we work on making our service better, trying to make it so the billboard on the front of the UI, you can just click it and watch it and just trust that result. Of course, having amazing breadth of content, which we've been expanding.
A couple of years ago, we only had premium TV, and now to be really good in movies, to be really good in unscripted, converging in animation, very strong in local language shows and series. It's incredible the expansion that Ted's pulled off over the last five years. Think of it as just us doing more of that at higher scale and pleasing more people. No change in the focus or the execution preparing for greater scale.
Kannan, I tell you, we have to make the shows and the films that people love and the stars that they want to spend more time with and being able to launch those brands, whatever your taste is all around the world, is such a monumental job, and I'm just thrilled that we have such a strong team to do it together.
That's great. Maybe we could just start with the environment we are in the middle of right now. Things seem to be opening up, but now looks like things might go back again a little bit. When you think about the environment around you, a lot around us has changed, the way we work, the workflows around different organizations. When you think about your plans for Netflix going forward, how has COVID impacted your plans? In what instances are these plan changes permanent? Can you actually benefit, either from a cost perspective or a workflow perspective, in some way that might be here to stay for much longer?
You want to start, Spence?
Sure. Generally, Kannan, it doesn't change too much. What we've learned is that the internet, as Reed said even last quarter, we know that's a more important part of our lives, and that's kind of here to stay, and also that people love film and television shows. Our strategy is just to get better and better every day with that content, with that product, as we talked about. You can see in the business, we can talk about it here at some point, obviously, we've seen some pull-forward in our member growth, if you will. Our strategy hasn't fundamentally changed. There's things on the margin in terms of things around real estate strategy and how much content we acquire or commission in certain parts of the world. Fundamentally, our strategy remains the same and the growth opportunity is as big as ever.
I could jump in on the production side. It's been remarkable how nimble the teams have been to going from full-blown production to completely shut down to ramping back up all over the world in the space of a few months. I think some of the things like the safety protocols that we're putting into place around the world will become a permanent part of production, which is a good thing. I think this time in between the shutdown and ramping back up, the extra time that was spent on scripts and development and preparedness will make the shoots actually more efficient, which I think will stick around.
I think when it comes time to releasing the programming and the content to the world and working with the press on how we do that, we've done these remarkable virtual press junkets with our publicity teams that have put talent in front of the best writers in the world, almost uninterrupted, just from their living room instead of a hotel room. The pickup and the efficiency of that, some parts of that, I think, will probably last a long time. The different marketing functions, how do you backfill not being able to host a screening? All of those things are being learned, and I think some of those things are going to be appropriate for certain content from today on. I think we'll just be better and smarter, the way that we've come out of many tragic things in our history.
Just to pile onto that, I think it's been an opportunity to accelerate things that we were already excited about. One, I think, great example is creating a sort of technical infrastructure that allows distributed content creative artists, think about visual effects artists, animating artists, to be effective when they're at home and collaborate collectively on assets. We think that was in the plans before this all happened. The opportunity to accelerate that and make sure that we're incrementally more effective during this period has been great, and we'll learn a bunch from it that I think will serve us quite well as we go back to a more normal working pattern.
Yeah.
That's great. When you look at the first half in terms of the subscriber numbers, obviously, you guys did close to the numbers that all of 2019 did. When you think about your guidance in that context, it does seem to embed an expectation of a lot of pull forward of growth. Over this period, we've also seen cord cutting reach record levels, and that doesn't seem to be slowing down. Some parts of the world, again, seem to be shutting down right now. If you could just help us think through the framework for growth for the next quarter and the guidance, that would be great.
Sure. You want me to take that one? Okay. Kannan, you really nailed it. When we think about the guidance for Q3, we're not thinking about Q3 just in and of itself. We have to look at it in the context of what just happened in Q2. We just added 10 million members, which is the largest growth we've ever had in a second quarter. We kind of look at the totality across the Q2 and Q3 period. If we look at that quarterly period, two quarters in a row, the best we've ever done in that period is actually two years ago in 2018, where we grew by 11.5 million members.
If we, this year, deliver on that Q3 guidance, that means we're growing 12.5 million members in that same time period, which is a million more than we've ever done, which is, we think, big growth on top of what was already a very big Q1. The nice thing is that those newer members are actually highly engaged. They're sticking around with us actually as well or better than pre-COVID, and our service keeps getting better. Netflix 2021 is going to be a much better service than Netflix 2020, which gives those newer members and existing members even more reason to stay highly engaged and stick around, and also to entice future members to join. We think that the growth opportunity is as big as ever. There's just that kind of near-term pull forward that you're seeing.
Yeah. When you think about other components of guidance, obviously what stands out is the margin and marketing spend as a proportion of revenues is 7%, which is obviously extraordinarily low. Also the guidance with respect to content being more back-ended next year versus this year. That would suggest that as you go into the second half of this year and first half of next year, your marketing spend should continue to be lower than usual. First of all, is that the right way to read it? Structurally, does this also mean that the amount you need to spend on marketing as a result of the kind of engagement growth is lower going forward.
Well, one of the things that's unique about our services, our members spend a lot of time on Netflix every day. It turns out the best place to talk to them about Netflix is on Netflix. Our investment in time, energy, and dollars goes into kind of building the conversation, the zeitgeist, the buzz around our shows and our stars, and how do we make sure we amplify that even when you're out on Netflix. In terms of the march towards less traditional media, we've been on that for some time, meaning that it's just a more efficient, more impactful, and more global way to talk to our members is not always through the most traditional channels. Yes, you're spending less, but doing more to attract buzz and attention to our shows, trying to cut through a world where there's a lot of choices.
Maybe the only thing I'd just add is a little bit of what Ted touched on earlier, which is we assume marketing in general would be about flat this year, which is still about $2 billion of spend, which is a tremendous amount of spend across our marketing channels. It does look like it'll be lower because of some of those things we're seeing in this kind of new world in terms of more virtual junkets and PR and actually not doing as much awards marketing and those sorts of things. Some of that is temporary in nature. Some of that is permanent learnings as to how we can be more effective going forward.
I think you're right that as a result, most of this is just consistent with our strategic shift, and some of it is some near-term, I guess, cost benefit from what's happening in the world.
Okay. When you think about-
Kannan, on that the service has just been able to generate amazing viewing. As the service gets better and better, we're able to take advantage of that.
Right. When we think about your margin guidance for next year in that context, you have been improving margins about 300 basis points every year. That looks like there is incremental opportunity now, but the guidance for next year is consistent more or less with the broader framework. Is that just conservativeness or is there something else guiding that as we go into next year?
It's called tamping down the expectations. Excuse me. A great growth opportunity for us. Any revenue upside, we would tend to put it into more content for our members, which generates more growth over time. We've been pretty good about that, which is taking that upside and then converting it into more and more growth through service quality. That would be the plan.
Okay.
I would just say that to Reed's point, we're always looking to spend strategically and invest strategically in the service. We did signal that in the very near term, there may be some margin upside this year in 2020, but we're really kind of trying to manage so that multi-year continuing to increase our margins, which is why we wanted to let folks know that we're, at this point, managing still to another 300 basis points increase next year, which would get us to that margin.
Worth reiterating in an environment where Netflix 2021 is better than Netflix 2020.
Yeah.
That's great. Just to follow up on that comment, when you say it's better in 2021 versus 2020, are we talking about subscribers? Are we talking about the amount of content? How should we frame that?
I'm talking about the forward trajectory of the releasing of the concept that's coming your way. Think about it right now at a time where most of the world is at a standstill. The rest of this month, you're going to see from Netflix a brand-new series starring Katherine Langford from "13 Reasons Why" called "Cursed," a big, large-scale movie that kind of re-imagines the King Arthur legend. We have a sequel to one of our biggest movies, "The Kissing Booth 2," the original that kind of birthed the rom-com movement on Netflix with Joey King and Jacob Elordi. We have a new season of "The Umbrella Academy," one of our most global and most successful series on Netflix that was a big hit for us when it came out in its first season in 2019.
Going right into a big high-octane action thriller named Project Power with Jamie Foxx and Joseph Gordon-Levitt. It's that kind of ongoing beat of content and programming. Think about this, that last year, we had barely dabbled in competition and reality programming. This quarter alone with Floor Is Lava and Too Hot to Handle, we had two of our biggest hits ever, not just in that genre, but in all of our programming. Too Hot to Handle as a percentage of watching was as big in Japan as it was in the U.S., which is a wild phenomenon. That to me is all those learnings that keep compounding and expanding across programming genres that make it a great value for consumers.
That's great. I guess sticking on that theme for a bit, when we think about the content mix, obviously that's changed quite a bit over the last few years with reality shows and now animation and so on. When you think about this particular mix, reality shows do seem to be a better return on investment in some ways because a lot of them have shown up, like Too Hot to Handle is in the top 10 list, was there for some time. Is this even a framework that you consider, which is when you invest in something, what the returns are versus the engagement?
The big motivation to invest in reality and unscripted is not the cost savings of production, but the love that people have for this programming and how important it's become in people's lives. If we're trying to be more and more your go-to destination for entertainment, not to ignore an area of programming that kind of dominates broadcast would be silly of us. We've been dabbling in unscripted and reality. We kind of got very accomplished in the documentary space, and then have moved that over to expand that to unscripted and then now the competition space, which this is only our third or fourth show really in the competition space we've dabbled into. The motivation really is consumer love for the programming, not the marginal cost savings.
Okay, got it. Greg, just to think about the world from a distribution perspective, there's a lot going on right now in terms of disputes. Peacock and HBO are not getting carried on Roku. Of course, they're having problems with Amazon as well. Globally, when you think about this, I mean, it almost feels like the legacy cable network MVPD disputes of the past, where the aggregators are essentially becoming gatekeepers. How do you see this playing out, and is this a risk in the future for Netflix?
First of all, I think it's just really unfortunate when those negotiations between a device manufacturer and an entertainment service provider get to this point where it really impacts consumers, and they can't watch the shows that they're thrilled to watch on the device that they have. We've been lucky to be working, investing alongside, collaborating with a wide range of device manufacturing partners around the world and really working together, to create better Netflix experiences on those devices. That's really a very positive model. It's a win-win-win, right? It's great for us. We get to reach more of our members with better experiences. It's great for the device manufacturers because those experiences make those devices more valuable, more attractive. Most importantly, and ultimately, it's a win for consumers who are sort of the benefactors of those better experiences.
We're going to keep investing in that model. We have whole teams that basically do nothing but work to make that whole process better, to make it easier for our manufacturing partners to ingest the technology that we produce for those better experiences, to think about how do we leverage the qualities and features of the devices that those manufacturers are investing in their side to really show off those benefits. I think we're hopeful, and we expect that that positive model will be able to continue.
Okay. I guess, the other model for distribution is just your deals with MVPDs as well as wireless companies, and you have a number of these deals globally. When you think about mature markets like the U.S. versus the rest of the world, your guidance for next quarter as well as the broader growth framework would suggest that marginally, these become a bit more important than the organic growth channels. How are you thinking about these wholesale distribution deals? What kind of role do they have going forward? What's the objective you're trying to solve for when you get into a deal with these guys?
Yep. I think you have it right, which is that we think that these will grow in importance, but I think it's also important to note that they remain a relatively small percentage of our total acquisition and really what we call the organic channel. People signing up with us directly is still very much the dominant mode. We think about the criteria which we are evaluating these partnerships on two fronts. Obviously, we're looking at it as how much growth acceleration, how much membership acceleration do we get by adding a channel like that? Wanting to understand what large are the revenue impacts, right? There's some cannibalization. There might be different economics involved. We want to evaluate that and make sure that we're doing these on a positive revenue basis.
The other very important lens is we actually look at it from what's the consumer experience, what's the member experience? We're looking at it qualitatively, just sort of understanding what that member journey is and working with those partners to make sure that that's as positive, as friction-free as we possibly can. We all obviously back it up with the metrics, too, right? We're looking at engagement and how frequently people use the service, churn characteristics to really make sure that we're delivering a high-quality experience to our members through those channels. I would say that we're very positive on both of those fronts. To your point, we expect to continue to do these deals, to expand these deals. We're working with multiple partners, both in, to your point, territories that we're sort of further penetrated in.
It's also a great accelerant to territories that we're still in the earlier phases. We think both are great places to do that kind of partnership.
That's great. Then I guess, looking at pricing, which is also slightly linked to the distribution discussion to some extent. When you think about the pricing algorithm we've come to expect, it's been in that mid-single-digit growth range over time for Netflix. More recently, I think when you strip out the effect of the price increases, it's trending a little bit lower than that because of some of the newer plans. When you think about the pricing algorithm, how are you thinking about that going forward? Is it still the same mid-single-digit kind of a growth profile that you're thinking about, or has that equation changed?
I think it's important to start with just reiterating what we mentioned last time, that really for the last several months, we've been principally focused on just making sure that the service has been there for our members when they turn to us for a moment of escape and entertainment. We're very much enthusiastic about being able to serve in that role. Actually, we've invested in making the service more valuable through that period of time, adding more content, adding more service features to that period as well. When we look forward, I would say, every country is in a different mode. We're going to sort of continue to assess a bunch of different factors over time. We'll look at macro factors country by country. We'll also look very closely at our specific metrics. It's metrics like engagement, like churn.
Those are the signals that we have for indicating when we have created more value for our members. Back to your plan, and it's not so much sort of an a priori plan that we have, but really more using those signs that we've done a good job at building more value for our members, which indicates to us, "Hey, it might be time to go back to them and ask them for a little bit more so that we can then invest that further into amazing stories, great content, better product experiences, and create even more value for them.
Can I just remind you, we don't narrowly manage towards an ARPU number or an ARPU growth number. Our orientation is really optimizing for revenue.
Yeah.
Great.
When we think about the way you manage this whole dynamic on yield, which is revenue maximization, obviously units are a part of it, pricing is a part of it, but the other important component of this is churn. Given the scale that you have right now, even small movements in churn can have a massive impact broadly on the entire income statement. When you think about churn, given the COVID period and the increase in engagement, is that structurally leading to better churn performance in cohorts that are potentially newer versus cohorts that came in earlier? If you could just help us think through consumer behavior across this period as engagement has gone up, that would be great.
Spencer, do you want to take that one?
Sure, I can start. The short story, Kannan, is that these newer members look very much like the members that are our preexisting members of the business. It's very broad-based, and you can see that these members are coming in from everywhere in the world, being a few million each in APAC and EMEA and UCAN, and then a couple million in LATAM. They're highly engaged. Actually, the retention across every cohort is as good or better than pre-COVID. Not surprisingly, this membership base both new and older, loves film and TV content, as we said, and they look pretty similar. I don't know, Greg or Ted or others, if you'd add to that.
The one thing other than the sort of big structural engagement change, which was sort of really a result of people being in lockdown and quarantine and turning to us for some escape, I would say, to Spencer's point, backing up the high-level churn pieces, when we look at other sort of metrics that inform how they're engaging with the service, we see it being very similar to a member we added pre-COVID.
Okay.
I was going to say, Kannan, it's a little oversimplified, but I think of it as when someone churns, it's always temporary. They're going to come back. It's just a matter of timing as our service gets better, as maybe their income increases, as the internet gets faster. We love people who get a taste of Netflix. We hope they stay for 50 years. If they drop out, we think of it as always temporary, and we're going to work hard to improve the service enough that they want to spend money with us.
It's been interesting to see the evolution of our relationship with that member where they used to think of us as the place to watch the reruns of the shows that they missed on other networks, all the way to now to where they come to us to be their favorite show. Now for Friday night at the movies, where you have Netflix premiering the biggest movies in the world on Netflix. It's an evolving relationship constantly, but nothing unique in this subset of folks in terms of their watching and their churn behavior. It's exciting.
That's great. When you think about the product itself, one of the big discussion points has been content discovery because there's an enormous amount of content, and there are an enormous number of streaming services now. We've got to sort through all of that in order to figure out what to watch. When you think about content discovery, I mean, Greg, I know you run a lot of A/B tests all through the year. You run hundreds of them. What are the kind of things you're thinking about in terms of improving the experience? You have the top 10 list. How has that done? If you could just give us some sense of how you're looking at that issue.
Yeah. Well, I'll talk about the top 10 list and then get to the big macro question, which is one of my favorite questions, of course. Thanks for asking that one. The top 10 is an example of a nice little positive lift in overall engagement, if not game-changing. More importantly, it actually speaks to what we think is a real member need that some of our members, not all, have where they want to know what shows are popular. They can watch those easily and then participate in the broader social conversation that's happening around those shows. I think it's indicative of the kind of work that we need to go do, right? I think that we have created literally the most incredible collection of entertainment options that have ever existed available to a consumer at a click of a button.
Ted's team is off producing more and more fantastic content at an accelerating rate. That is for our members, simply wonderful. It creates both challenges and opportunities for us as a product team to think about the experiences that we evolve to make the process of choosing and finding a great story, and that is delightful and as easy as we possibly can. Now the way we think about it is actually that we have to make almost every aspect of that experience better. It's not going to be one thing that's going to be sort of like suddenly make a perfect choosing experience. We have teams that think about exactly how do we pick what titles are perfect for each member? How do we pick those recommendations and make those better every single day?
How do we present those titles in a more compelling way, a way that's specific to what we think the member's interest is? We're thinking about how our user experiences work and the features that are included in there. We want those to adapt and evolve so that they can be responsive to the specific needs of a growing number of members around the world that have growing and diverse needs from our experiences. Perhaps the unhelpful answer is it's going to be literally hundreds of things that are going to have to change. When you aggregate all those changes, they're transformative. I would invite you to go back and look at a Netflix experience from five years ago compared to today, and it's just stunning how much progress we can make through that process.
We are committed to making even more progress in the next five years to come to make that wealth of content a joy for our members around the world.
Reed, I guess one of the questions that this raises is, given the amount of content, a comment that you had made, I think this was in 2017, was that Ted was not failing enough when it came to the success rate of shows, and he was too much. Do you think you're at a point where there is enough balance in the portfolio of content that you have, or do you feel like Netflix has to take more risk in terms of the portfolio? Where are we in terms of that mix in content?
I hear excellent about the number of big bets that Ted has coming up. I'm privy to stuff that we're doing now that will come out in two or three years, and it's a little amazing. Some of it will turn out truly great, and I'll be so proud of it. I'm excited that we're taking those risks. We want to have so many hits that when you come to Netflix, you can just go from hit to hit to hit and never have to think about any of those other services. Right? We want to be your primary, your best friend, the one you turn to. Of course, occasionally, there's "Hamilton," and you're going to go to someone else's service for an extraordinary film.
For the most part, we want to be the one that just always please you with the convenient, simple, easy choice.
That's great. Ted, from your perspective, when you think about production worldwide, obviously we are still in a shutdown mode, and there are still issues around the world. While things are getting better in Q3, it seems like there would be some impact for the 2021 ones, given your comments about it being more back-end weighted. On the other side, you also have content that the studios are not able to release ahead quickly, right? When you think about this, does it make you think about the mix slightly differently? Maybe do we get a bit more movie-heavy initially compared to originals maybe later in the year? What else can we expect because of the kind of disruption going on right now?
Well, I mentioned last quarter, one of the benefits of releasing our series all at once is that we work very far ahead of our release cycle. That's how we're able to continue to release this ongoing steady flow. Even during the shutdown, we're partially shot on a lot of shows. When we pick them back up, it's not like starting from scratch again. Outside of North America, parts of India and Brazil, we're running pretty much in normal fashion in terms of our volume around the world, and it's ramping up in different various stages of pre-production. We've got a couple of shooting days in Los Angeles this week that we're really excited about now that's coming back around.
I do think that our ability to keep up with that is a lot to do with our kind of unique offer to the consumer that turned out to be a hidden benefit at a time when things would be shut down. The other one was the kind of nimble nature of our creatives who could, on a dime, pick up post-production remotely on shows that were already running. As far as film to TV, they both require a lot of prep work, a lot of creative at the beginning, the production, and then a big long post-production cycle. Very similar in terms of the work cycle, so I don't see us pivoting to that. I do see that there's opportunities. We did a few with the studios to pick up some movies that they were having a hard time releasing.
We've also picked up a couple of nearly finished seasons of television with a brand new show called "Emily in Paris" that we've got coming up later this year with Lily Collins, who we really love. "Cobra Kai" that we picked up from YouTube. Not just the first two seasons, but a brand-new, yet-to-air third season that we're finishing right now. That, by the way, was a show that was super competitive three years ago when they brought it to market, and we were devastated not to get it to start with. We're excited to have "Cobra Kai" in the Netflix family. There's all kinds of adjustments. Our ability to license and produce, create very long lead and very fast, like you saw us do with the "Tiger King" finale episode a couple of months ago.
I think it's our ability to do all those things that make me really excited to jump out of bed and come to work at Netflix in the morning.
That's great. When you think about different pieces of content, movies versus TV shows or even within TV shows, different genres. Is there any difference in origination versus retention characteristics of different pieces of content? Do movies originate better or retain better versus TV shows? Is there anything you can tell us about that?
Both films and TV can have the same exact attraction to consumers in terms of what gets them excited, how they behave after, how they retain afterwards, how they tell friends, all those things. A really great experience is what they're looking for. The chances that they're going to have that are higher on Netflix than anywhere in the world. Going to the thing you said about earlier about having so many great choices to make. I think a film that's usually successful can be very acquisitive, it can be retention driving, and also could bring a lot of joy to our members. Series can do that as well. It just depends on what you're in the mood for.
Kannan, we have time for one or two more questions.
Sure. Maybe, Spencer, a couple of questions in terms of the guidance and the financial end. One of the things that came out was the free cash flow margin was 15% and your operating income margin was obviously 22%. Could you just help us bridge the gap on how do we think about cash flows going forward?
Sure. Thanks for noticing the positive free cash flow margin. Two things explain that variance. Number one is obviously CapEx. That was about 200 basis points of the difference between the free cash flow margin and the operating margin. The second expense item was interest expense, which obviously falls below operating income, but obviously reduces free cash flow. Just keep in mind that while we accrue our interest expense quarterly, we pay cash interest primarily semi-annually. You actually have about roughly two quarters of cash interest expense in Q2.
I'll just add, great Spencer. Just to add to Spencer's point, when you think about cash flow going forward, it was a bit of a unique window into that forward-looking cash generation opportunity or potential for our business because of the pandemic. We generally are forward investing into the growth of our business and into content. Our content cash spend is in excess of our content expense in a given year. Because of the pause in productions, you can see that basically that cash spend and expense and content were the same this quarter, essentially at a one-to-one ratio. As a result, as we said in the letter, it resulted in a 15% free cash flow margin. Going forward, we do expect to turn cash flow negative again in 2021 as our business and our production ramps up.
We're still on that multi-year path to being cash flow positive. When we are sustained cash flow positive, we expect to be a much bigger and more profitable business. Hopefully, that 15% cash flow margin is just the start.
That's great. I guess since we have time for maybe one last question, we could just think about the world going forward.
When we are sustained cash flow positive, we expect to be a much bigger and more profitable business. Hopefully that 15% cash flow margin is just the start.
That's great. I guess, since we have time for maybe one last question, we could just think about the world going forward longer term. Reed, from your perspective, a lot of the franchises that are getting created in today's world seem to be coming from the video gaming side. A lot of shows that you have, which have been very successful, have been from that side. Obviously some of your shows have become video games in some instances. Even the interactivity of some of your shows makes them feel like video games. When you think about the way the world is evolving, it just seems like these two sides of the world are starting to converge to some extent, both in terms of the kind of content as well as the experiences.
Why not think about video games as an extension of where Netflix is today? If you could just help us think through that framework and how you consider that going forward.
Sure. If you think about franchise IP development and "Harry Potter" and then just hundreds of enormous franchises that come out of full-length books. There's Marvel and our own "The Old Guard" that come out of the comic book world. There may be a few coming out of video games, but that's pretty small. Really think of it as the big franchises have come out of books and comic books.
Video games, great and interesting area. It's got a number of aspects in terms of multiplayer that are changing, esports that are changing, PC-based gaming. It remains a very interesting area, but Ted's got big plans to spend future billions in our movies and series and animation. We got lots of places to put the money. We're definitely focused on creating franchises. Maybe Ted, in your co-CEO role, maybe you can wrap us up here with final comments and about building franchises.
Yeah, look, I think franchise is the act of successful world-building. Video games obviously have world-building aspect to them, but so do books, and so do graphic novels, and so do comic books, and so does original IP. Really, this is a matter of how well it's executed. We were really unbelievably encouraged by the first attempt at it here with "The Old Guard," which is kind of a new flavor of that kind of storytelling that I think has got a world and stories to be told for some time to come. I look to other things that were more original IP, like "La Casa de Papel," which in this quarter, "La Casa de Papel" was the most-watched new season of television on Netflix, hands down, not just non-English English.
That's in its fourth season, and it's become an incredible world that we're going to keep building on. IP is a great place to start. Like everything else in the world, it's hugely execution dependent. If you do it well, people want to come back for more, and you don't disappoint them, you can keep doing it. We're really thrilled about it and thrilled about doing it from a variety of sources.
That's great. Thank you all. Take care.
Thanks, Kan.
Thank you.