Because by doing it en masse, as a business venture, they are way beyond the "fair use" coverage in copyright law. If they had partnered with the studios to do this, they would have been fine, but they went ahead even after permission was denied.
So, I return to my original question: Why is the combination of two ostensibly legal activities under one roof illegal? Selling legal copies of movies is legal. Editing a legal copy of a movie for the owner of that legal copy is, presumably, a legal service. Why do they get twisted up in knots when both are done together by the same company?