I get what you're saying in that it can be used for something currently, but the opportunity being missed here is enormous. When Gmail launched with 1GB of storage when everyone else was doing 5mb, this was a pretty massive cost at the time. However, it was one of the best things Google ever did as it kick-started their entire online application business.

Google has a similar possibility here - they can really take over the webapp hosting environment and create massive ease of use and integration for their various web platforms and APIs by making it easy to integrate them into AppEngine. The requirement for this is massive adoption, and the requirement for massive adoption is, at the very least, providing similar cost/performance as a random dedicated host. AppEngine/Google compute engine are barely competitive with other very expensive, high margin services such as AWS. Google is missing out massively here because they want to squeeze out traffic penalties with a terrible business model that gives users across the web a nice error message.

They've at least had the sense to be guilty enough to remove their branding from the error page though.