App Engine is very cheap for startups. I would even say it's a game-changer. I 
built two startups before PaaS became an option, and I can say with certainty 
that App Engine would have saved me millions of dollars each time.

Most new applications can happily live within a free quota until they prove to 
be useful for a significant number of users. A well-built app will have a to 
serve a whole lot of users before it costs more than $200 per day on App 
Engine, and that's still cheaper than a single systems engineer or a DBA.

I think that App Engine is difficult and expensive for less-experienced or 
less-qualified developers. Sloppy data models, unnecessary indexes, overly 
complex queries, unintended dependencies, large third-party libraries for 
simple tasks, wrong headers on static resources - these mistakes are not always 
noticeable when you run your own box, given how cheap and powerful the servers 
are these days. With App Engine these mistakes add up very quickly.

On the other hand, App Engine gives you all the information you need to analyze 
your bill. Once you see that a certain item becomes significant, there are ways 
to optimize your application in order to reduce costs. I certainly advocate 
avoiding basic mistakes from day one, but there are certain optimizations that 
make sense only when volume picks up. For example, you can move a backend task 
to a Compute Engine instance, which is many times cheaper, but requires more 
work to set up and manage. Or you can split a complex data entity into two 
separate entities so that a minor change will not result in multiple datastore 
writes. Or you can unindex some properties and iterate through query results, 
saving on writes and data volume. Or you can set the correct chunk size on your 
queries - something that many developers probably forget to do. And so on.

I am working on an app now that loads, processes and indexes 1 million web 
pages and creates app. 10 million datastore entities for less than $100 in App 
Engine costs. I don't know what your application does for your users, but 
that's a whole lot of processing power for a hundred bucks. Once we hit a 
million users or so, we will move some of our processing load to the Compute 
Engine, but the effort does not make economic sense before that.

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