The arguments for cloud look different: services offered by the cloud providers, higher flexibility, no capex (though at small scale you can rent and at Netflix scale capex is presumably not an issue) or better scaling in highly variable loads.
Netflix encoding servers probably have very variable load since releases vary depending on season (like the flood of films for Christmas).
At one point it's quite possible that a combination of the two is the cheaper option.
And yes, you're completely right, load variability plays a huge role in all this.
- maintain the physical machines
- build or rent data centers
- have people to operate, maintain, upgrade the machines
- set up, build, maintain, update, upgrade infrastructure for your projects to work on your machines
All these costs are not insignificant when you need more and more machines. And as it was mentioned above, they don't do well when demand is variable: when you no longer need as many machines, you can't just decommission them. When demand spikes, you can't install new servers instantly.