It cannot run most web apps
"But even without paying for extra resources, you could run all but a minority of today's web apps"
I've been playing with AppEngine and follow the user groups regularly. AppEngine sacrifices a lot of functionality taken for granted in web applications, specially on the database side, for the sake of scalability.
True, it can scale to gigantic, google-like proportions. And the catch is, only a very few selected lucky apps will need to scale to those proportions. The rest are fine using conventional relational databases, whose features are mostly missing from AppEngine storage engine. Of course, those limitations are not so important when you have access to a MapReduce engine running on thousands of machines.
IMHO, Google are hoping that the next Twitter or Facebook will be born in the AppEngine. But I think that we will not see a massive migration of entire classes of applications to AppEngine.