AWS makes sense if your needs are elastic. Netflix's needs are elastic, their usage grows and falls over time and even over the hours during the day. Most sites' aren't.
If you know you need a server or two with a certain amount of RAM and HDD space, then rent a server or two at a high-quality DC like SoftLayer or Rackspace. It'll be cheaper, and you might be surprised how many "instances" worth of performance you get out of a single real box. You can treat those servers the same as virtual servers in every way -- they just take 2 hours to "boot a new instance" because someone has to build and provision it to your account at the DC.
You don't need to buy your own hardware and colocate unless you have specialized hardware needs.
I agree with you, but I'd like to remind us of something. Netflix doesn't use AWS for their primary thing: streaming videos. So their AWS workload is probably just not that demanding. What runs on AWS is just a bunch of scripts for selecting which videos to stream. Since the costs of hosting these scripts are negligible compared to the cost of streaming videos, Netflix just doesn't care about the fact that they are overpaying. If something is responsible for 0.1% of your costs, the fact that you're paying 2 to 10 times more for it is easy to ignore. That's the reason why they still use AWS. Their needs are not particularly elastic, in my opinion. Yes, people probably access Netflix more often in the evenings and weekends, but that is true of just about every entertainment website or blog, and it doesn't make AWS cost-effective.
If you know you need a server or two with a certain amount of RAM and HDD space, then rent a server or two at a high-quality DC like SoftLayer or Rackspace. It'll be cheaper, and you might be surprised how many "instances" worth of performance you get out of a single real box. You can treat those servers the same as virtual servers in every way -- they just take 2 hours to "boot a new instance" because someone has to build and provision it to your account at the DC.
You don't need to buy your own hardware and colocate unless you have specialized hardware needs.