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Tenant's rights
That's all just a bit too cynical. While the terms and conditions include a number of scary phrases giving Google the power to do pretty much anything with your baby, they seem like rational responses to the scary prospect of letting anyone put applications on your cloud. Copyright violations, spammers, and pornographers must keep the lawyers at Google up late at night. The lock-in is a real problem, but it is mitigated a bit by some of the open source licenses. Python and Django are pretty much free if you want to take your application and run with it. The hurdles and caveats are annoying, but the App Engine formula seems like a serious play for the low end of the marketplace where small developers create niche applications.
The service is best for the simple applications that plan on staying simple for the time being. While the cloud's ability to scale the application quickly is a nice feature, the limitations of the service should be constraining for anyone who has big dreams built on complex code. The sandbox offers only limited services, and the legal issues are still new. While the Google lawyers did a pretty good job of anticipating many of the potential potholes for the service, that doesn't mean they can go away. Google reserves the right to "pre-screen, review, flag, filter, modify, refuse or remove any or all Content from the Service." Will Google be a good hosting provider and treat the small fry like a partner, or will it just nuke entire applications when a DMCA notice shows up? Time will tell.
It's worth thinking a bit about the long-term plan when your hairdresser chats away about a brilliant Web application while cutting your hair. Some whispers I've heard suggest that Google might just steal your application, perhaps copying it. I'm not sure why hosting it with Google would make it any easier for them, but maybe forcing you to map it onto their architecture might help a bit.
There are any number of competitors. Amazon has its own cloud, but it takes a very different approach, giving the user an empty Linux shell. That may offer plenty of freedom, but it offers none of the handholding. It will probably take you longer to install a JVM on Amazon's Elastic Compute Cloud than to spin up a three-page Web site with Google's App Engine. But Amazon's SimpleDB also offers a richer API, including real Web services for REST and SOAP queries.
The biggest competitors may be the old-school Web hosting programs that let you share a server for a few bucks a month. They may not scale automatically, but they give you plenty of control and an older, more established type of user agreement. And while they may not be as magic as Amazon, they have a number of tools for migrating customers to bigger boxes. The last time I asked my shared hosting service to move to a new server with a different version of MySQL, it was done in an hour or two. That's not automatic, but it only took an e-mail message.
Work in progress
It is almost unfair to review the Google App Engine when it is just a beta operation, but Google has a habit of leaving some tools in beta form for a long time. There are a number of places where the documentation and the code suggest that Google will add more functionality pretty soon. The basic framework and the database are both quite nice, although limited. I can imagine Google adding better automatic features for generating the CRUD (Create, Update, Delete) routines common in these applications. Integration with Google's Wallet might also be quite useful, although it's bound to be complicated by the banking system. Some people have already experimented with mapping the Google Web Toolkit to the system, even though that's written in Java and translated into JavaScript.
Google might also provide some good tools that allow the different hosted applications to share user information, essentially allowing a user to move their preferences and some of their data to other applications. This kind of inter-application linking could be pretty cool.
Time will tell what Google delivers. In the meantime, this is a good sandbox for playing with simple database applications. There's a very good reason why the beta version has a waiting list.
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Read up on the latest ideas and technologies from companies that sell hardware, software and services. The state of Middleware
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