I have been reading a lot about Google App Engine. I even got one of the precious 10K initial accounts.
Many of the complaints are about the limitations. That is completely the wrong way to look at it. Amazon Web Services provides tools to create flexible tools to create Internet Services. They are pretty easy to use so lets think of them as a Black and Decker power tool set. With a bit of work, you can cut boards and build a house.
Google App Engine is a Saw Mill. Great for wiping out entire forests of trees. If you want to hang a picture, you are doomed. It is not for creating blogs although this blog might be hosted on it. It is for creating a service to host millions of blogs.
They gave enough free resources to host 5M page views per month. That is probably because 5M page views is beneath their notice and a rounding error.
I can understand the concerns about Google lock-in, etc. That is fine if you have a smaller problem. However, if you need Big Table and Google scale, you would be a fool to write it yourself. Google has spent billions and man centuries of PHD time optimizing the life out of it. They have not announced pricing but I have a hard time believing that it will be more expensive than Amazon or any other ISP for forest clearing.
GAE will not be a competitor for most ISPs just like saw mills didn't put Black and Decker out of business. It will accelerate the develop of Internet Scale businesses. Things that just required too much VC money before.