I've always though App Engine is kind of a half-assed version of AWS, so maybe this time they're announcing something worthy of Google's brand. With all all the infrastructure knowledge they have I always felt App Engine was way too poor a service.
GAE sandboxes you with their proprietary libraries, whereas AWS lets you write for unix/windows platform with minimal sandboxing. If you want to write a LAMP stack, you can just write a regular old LAMP stack with AWS. With GAE, you have to learn their java/python server libraries, then their blobstore/google cloud storage/googleQL, and so on.
Thanks for the breakdown. I haven't used t he service yet but I can see how that would be painful to deal with, especially if one wants to move their service in the future.
App engine is a stepchild pos product. It should be deprecated and they should allow socket access, etc so that real web apps can be built on Google services.