But who is App Engine's real competition?
In a lot of ways, App Engine is in a class by itself. It competes on the high end with Amazon Web Services. But it also competes on the low end with every shared host out there. And thanks to the integration of Google authentication and the application directory you could also make a case that in an orthogonal way it competes with Facebook's application API.
At the low end, App Engine is a big deal for Python developers and anyone else who is allergic to PHP. Historically, you've really had to look hard for low end hosting that offered anything else. And as everyone who has given products away to colleges knows, Free is a fantastic hook to get developers to try out your platform. Once it's open for all, App Engine is going to become the preferred option for developers with the itch to write a toy or proof of concept and show it off to the world.
Less obviously (to developers, anyway), App Engine also a big deal for businesses that aren't quite big enough to hire a sysadmin, or who are big enough but still prefer not to deal with that complexity. (You thought hiring skilled developers is hard? If anything, hiring skilled sysadmins is harder.)
I suspect there are a substantial number of companies in the uncomfortable situation of really needing more performance than shared hosting offers, but not wanting the complexity of taking the next step, to dedicated servers with dedicated sysadmins.
Of course, given App Engine's constraints, porting such applications to it is only going to be an option in a few cases. The question is, are managers of new projects farsighted enough to see this problem coming and realize that app engine insures against it?
At the high end, AWS is the only real competition to App Engine, but as most observers have pointed out, they are different beasts. AWS offers far more flexibility, at the cost of far more hours from your ops department. (Although App Engine's datastore is a lot more sophisticated than the AWS SimpleDb, so the capabilities of AWS aren't a strict superset of App Engine's.) Contrary to the Joyent assertion linked earlier, it isn't necessarily stupid to trade flexibility for convenience. App Engine just works to an unprecedented degree in the field of high-end scalability.
As with anything this disruptive, there's been a certain amount of hysteria. Even people who should know better have repeated the idea that "nobody will want to acquire a product built on App Engine because you're locked in." This is stupid. Depending on a proprietary platform hasn't stopped products built on Oracle from being acquired, or products using AWS, or even products built on a proprietary UNIX. (Yes, those still exist.) Nobody will care if you build on App Engine, except maybe Microsoft and Yahoo. And even they can be pragmatic; Hotmail ran on BSD when Microsoft acquired them.
Lock-in is a real issue, but not because App Engine will keep you from being acquired, and not because Google will screw you once they have you in their clutches -- that would scare off new customers and thus be bad business. Lock-in is an issue because evolving requirements might make App Engine's confines less of a good fit than it started out. If you have to start adding servers at AWS or RackSpace to handle things you can't within App Engine, App Engine loses most of its value.