He mentioned that he was doing 12 requests per second, and it was costing him $10/day on App Engine. I rent a server from Rackspace, and do volume in the 12 requests per second range, and including bandwidth this costs me under $40/mo. Am I doing the math wrong, or is App engine kinda expensive compared to rolling your own solutions with virtual private servers?
It definitely can be, if you write your app assuming that you are working with a traditional server. You're very directly charged for writing inefficient apps.
I have a moderately popular app running on the AppEngine right now that initially had similar cost problems, but spending a few days with the cost profiler can resolve most issues. You have to be particularly smart about caching and datastore queries. What I found in the end was that after proper optimization, I was able to get a better value out of the app engine than with a normal VPS - but it definitely takes some extra work to get there.
timothyb89 is quite right. The cost wasn't just for a standard server, much of that came from the number of datastore reads I was performing, since the original backend wasn't using memcache the best, etc. It also wasn't syncing in the most efficient way, so that added a lot of overhead. There is still room for improvement, but just with a weekend of optimization, I've been able to reduce the cost by an order of magnitude. That, mixed with the automatic scaling makes it quite competitive.
