I use AppEngine to host my own projects but not for my customers (everyone who has hired me for a few years has wanted Amazon AWS deployments – no exceptions).
I think that the story for using AppEngine is definitely better with the 1.4 release. A charge of $9/month for keeping 3 compute instances always spun up for an application seems like a modest cost to workaround slow loading request times. (I have written twice about this: 1 and 2.)
Ten minute CPU limits for background processes is a nice increase over the old 30 second limits.
I have recently been using the Python AppEngine SDK for my latest side project (something I need for my own use and I am also planning on offering it to other consultants for a small fee).
Platform as a service: I have had the opportunity to help many individuals and companies in 14 years of running my own consulting business and I feel like I have a fairly clear understanding of the opportunity costs of manually managing servers. Small teams especially get hit hard when too much available engineering time is spent on deployments and administration of servers. I expect managed deployment platforms like AppEngine and Heroku will be a strong growth market. Managing servers and deployments may be fun but often does not make business sense.