Okay. I've just spent a couple hours playing with Google App Engine (see here or here for my results).
I am impressed! It comes with a tutorial which is easy to follow and in about 2 hours from start to finish even I managed to make a scalable (simple) web app. The free limits on usage that Google offers are ample for a not-too-popular webservice.
I think something missed in a lot of coverage is how tight the integration is with Google Apps for My Domain (GAFMD). I added my app to my GAFMD and it appears at just another service. This makes it possible for example, for a company to have email etc. hosted by Google and then have their own in-house apps also hosted by Google and managed through the same interface. I expect we'll see companies offer paid 3-party services soon.
Basically, Google has just moved the barrier of entry for scalable web-apps to nil. Yes there are some limitations, for instance, complete lack of offline processing. But they say that will change soon.
Oh. And if all you need is statically hosted websites - with two lines of code you can get that. So expect to see low-end website hosting slowly going out of business as people start to realize this.
This of course paves the way for Google to own even more of the web. But, for all the talk of lock-in, Google gives away a lot of the wrapper code for this service, so there is nothing stopping someone else from setting up a Google App Engine-compatible server farm.
PS My favourite application so far: an AJAX python shell.