Earlier quoted context omitted.
Your last point is very confusing. You're saying you think Google can't spin up more App Engine front ends if it wants? ("every machine in their data center can [not] be a web server") Or any other kind of front end?
Google historically splits off their "front end" which is dealing with messages from the internet and their "back end" which is processing what those messages want to do. It was briefly described in the original search paper they presented. Of necessity, most machines that Google runs have 'private' (as in not directly addressable) addresses. This is how it seems that everyone runs things when they get above a certai…
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.)