This is big for many, many reasons, not the least of which is the challenge that Google must face in supporting a language that is so challenged at running in a modular fashion. I will be extremely curious to see if the announcement includes OSGi (or, god help us, JSR-277) as a way to mitigate the difficulties in "mashing up" different applications, services and libraries in the same VM. Alternatively, like the Python implementation of AppEngine, it could just be that a restrictive set of Google libraries will be required, which in turn dictate which versions of core common libraries are used in any given application. The former would allow for a wider variety of applications, but the latter is far more likely, in my opinion.
Will any old Java-compatible library not considered "common" be importable, I wonder? How will they achieve the same balance of control and flexibility they achieved with Python? Somehow, I don't find myself concerned that the end product will have any serious bugs, just that there will be hidden restrictions that most Java developers will find annoying at first.
Hey, Google, if you do have a launch party, I would certainly love an invitation...