I think app engine pricing is pretty fair. The money you may save by 
managing custom servers you will soon loose with time and health which are 
both priceless (if you do it yourself that is).

I recently launched the app engine app I was working on (www.xehon.com). 
Its a pay as you go CMS. So the app actually computes the exact cost of the 
requests and storage(datastore and blobstore), and unless you do heavy 
video and file downloading it is really cheap. An new account comes with 5$ 
credit which is more or less 1$ of app engine usage cost. Even with heavy 
usage it would take weeks to burn if off. I guess in the end it all depends 
on your business model.

As for downtime or internal server error, I have rarely experienced it. So 
I am pretty satisfied with GAE. For now :p 

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