The real problems are the other limitations. Background tasks, full text search, MapReduce, support for uploading files larger than 1MB, not having short bursts cause the application to exceed limits, limitations in the datastore like only returning 1,000 records.
Those are real limits to what the system allows you to do. Python doesn't stop you from producing something, those limitations might. Learning a new language isn't that hard if you're a programmer.
I know Python-only is fine for many people, but for others it is a showstopper. I've got a bunch of Lisp code I wouldn't mind hosting on Google's servers but there's zero chance I'll ever take the time to greenspun myself macros, multimethods, parts of the MOP, various Lisp-only libraries, and so on that it uses, and then re-optimize my program for their unique architecture.
App Engine is an abstract distributed REST machine. EC2 is just x86 VMs (albeit with nice provisioning APIs).
At the same time the entry level cost for exploring an idea in code has been reduced yet again. Explore an idea, create something and see what happens. If it works then inject some funds. If it fails, the outlay is time and effort only.
I'd much rather get some cheap hosting somewhere else than develop for free on appengine. Its an interesting platform but there are still too many limitations for me to consider it for serious use.
Agreed, this will change in time. But I'd use this point to refine the idea as you suggest on cheap hosting.
"... The system is also very propriety and there is no (easy) way move an appengine app to a new server. ..."
Not convinced of that. The biggest problem is not the porting of an idea but replicating the scaling.