Latency ( 30ms vs 300ms) doesn't matter much in video playback, only throughput. Once you hit play, it isn't bi-directional.
But you're just nitpicking. This IS their core business, and they realized its "too core" to give to someone else.
So yes, you do "outgrow the cloud", and well, part of "outgrowing" can be cost structure. Gitlab offers a free service, their main competitor, github, runs their own datacenter. Why do you think that is?
Put another way, if there was a cloud DC in each major city and Netflix hadn't already started using their own edge nodes, then there's nothing stopping them from spinning them up in each cloud DC as opposed to their own hardware. There's nothing inherently special about their setup except location.
Nothing about this situation says that Netflix "realized its "too core" to give to someone else." I don't quite understand how you're making that leap. Instead, they had a very specific requirement (that most companies don't have, mind you) that current cloud hosts can't provide. Nothing else.
The video is the most important part of their product, so keeping it at your ISP or a local exchange not only lowers latency, but most likely also gives better throughput since it only has to travel through your ISP's network or local exchange links without having to go through the rest of the internet backbone.