Though it doesn't have the same HN buzz that Heroku does, App Engine has a fairly large developer community and a lot of applications using it. Like almost all PaaS product, there are restrictions that limit what you can do (library support, native code support, etc) and these limits frustrate developers that go in expecting the same experience as having a virtual machine. The limits mean that App Engine isn't the right solution for every application under the sun. But if your application doesn't have super unique requirements, the value that App Engine provides is hard to beat.
Ten second deployments, one click version management (and roll back), logs and monitoring, and autoscaling mean that we can be really agile pushing new versions of the application. App Engine's recent changes to the scheduler and Always On feature have really solved the slow instant start issue that still plagues a lot of Heroku developers. Last year the datastore had a ton of performance and reliability issues, but the new high replication configuration appears to have solved the problem. The biggest issue for us is the one that's mentioned here a couple of times and that's SSL.
For now, App Engine is nearly perfect for us. If we end up with unique requirements, we can definitely spin up a few EC2 instances and hook them up to App Engine's Task Queue. But I'm not excited about having to manage machines. Personally, if we hit a limit with App Engine, we'd be looking to another PaaS offering like Heroku or dotCloud, or Infrastructure as a Service like MongoHQ/RedisToGo before bothering to deal with machines again.