Without going into too much detail, it shouldn't surprise anyone that physical machines are interchangeable via cluster management software, so application front end and back end software all end up running on the same machines. They aren't addressed through DNS but by another mechanism. There is no special system administration for application-specific front ends vs back ends. Spinning up more instances of a particular server is a 1 line change. Reverse proxies (i.e. a non-app-specific front end) are also involved but they're not a bottleneck AFAIK (this problem is well "commoditized" in open source whereas other parts of Google's stack are not).
I would be curious to see a comparison with competitors like Heroku, which I've heard are pretty expensive too. Theoretically Google should be cheaper because Heroku runs on AWS and thus is paying for Amazon's profits (I have no idea how they compare.)
Yes, those offline processing instances could be suspended while dealing with a traffic peak, but peak traffic is still often a challenge, especially now that Google is pushing more and more stuff onto the web servers (Instant).
That might be what he meant.
Disclaimer - I don't work for Google, it's just a guess.