Plus the costs of maintaining that hardware both from an opex and capex point of view.
Plus the capex and opex costs of creating and maintaining the high speed network required to ship those files back and forth within the datacenter space that you're renting.
Plus the massive hit in how nimble your team can be. (Want to support a new codec? Either buy and install new hardware, or set the priority on these re-encodes lower and tell your boss to wait six months)
When you have an extremely variable workload such as Netflix et al, even though AWS/GCP/Azure are more expensive on a unit cost, your savings from operational expenditure will more than make up for that difference. Not having to buy and maintain a bunch of "just using baremetal machines" is a massive, massive cost savings.
Lambda / Google Cloud Functions / Azure Functions are a natural extension of this-- your write/test/deploy cycle can be much, much faster and you don't have to even worry about maintaining any infrastructure. The brainpower savings of this more than make up for the extra cost for CPU cycles.