AppEngine is nice, but it's a little limiting. No cron jobs, filesystem use nor customization with third party libraries, software, databases, languages, etc. You can't deploy PHP, Ruby and or your 'other' favorite web development tools. You can only use their tweaked versions of Python and now Java. It is free, but if you actually want to run an app on it and need more bandwidth, you purchase it from them. Why not do the same w/ dedicated virtual hosting?
Beggars can be choosers these days. Dedicated virtual hosting is so cheap I'm a little surprised that Google isn't on this trend. Amazon can do it at scale and there are numerous, smaller providers out there like http://slicehost.com, that I can't imagine the tech would be beyond them and/or they can't see profit from it. It's not their core business, but would be inline with their larger mission of expanding the web.
All these reasons point to a better AppEngine product from Google!