Google App Engine is a system whereby users can write Python web applications and host them with Google. So far, so boring, eh? Well, not so fast. It provides an OODB backed by Google's proprietary BigTable database system, allows integration with their login system, and limits users, in the trial period, to 500MB storage, with 10GB a day transfer either way. Oh, and some nebulous limit on CPU cycles; that seems rather generous, but we shall see. All that is free; once the trial period is over users will be able to purchase additional resources.
Users can use their own domain for their application, and there is an SDK which you can download; it fakes the DB stuff locally, apparently. I'd guess that the major short-term consequence will be considerable damage to the web hosting industry. After all, if you wanted to write a simple webapp for company use, or your latest startup, or whatever, why on earth wouldn't you use this? Google isn't infallible, but it can probably be counted upon to be more reliable than your average fly-by-night webhost; even the biggest ones in the shared hosting space seem to have nasty issues almost routinely. Oh, and Amazon, of course, with their weird SimpleDB thing; it's particularly unfortunate for Amazon that their web services division suffered a major outage on the eve of the Google announcement.
What's in it for Google? Well, first, obviously, it's yet another place to put the bloody ads. Ads are Google's lifeblood. Some have theorised that it'll make it easier for Google to buy startups who use the service; they could simply buy them without worrying too much about porting.
There's another possibility, though, and I'm surprised that no-one seems to have picked up on it thus far. Google's Google Apps thing provides private email, calendar, and so forth, to various corporate users and universities. Wouldn't it be nice if a small business could simply go to a website and buy themselves, say, a CRM, or an accounting system, or whatever, maybe paying by user count or per year, which would be private to them, hosted by Google, and integrate nicely with their existing Google login system? I suspect that Google will do something like this, something along the lines of Apple's proposed iPhone software store. The developer will get a cut, Google will get a cut, the users will have their application without having to worry about hosting it themselves... Everyone's happy. Except the webhosts, and the traditional vendors of custom corporate software, but it's not Google's job to look after them.
I've played with the system very briefly, by the way; it really seems very impressive. The ease of uploading the applications you create, in particular, is simply amazing. Their 'hello world' app takes about a minute to get up and running.
I must say, I'm impressed. This is the first sensible thing I've seen Google bring out in some time.