it could be implemented as follows:
The developer creates a CName record from *.<developersAppSubDomain>.<developersDomain>.com to <appEngineAppId>.appspot.com (if wildcard CName values aren't available on the developer's DNS server, then the developer will have to create one entry per customer).
When Google receives a request on the App Engine Server with an unknown host name such as
<subdomain>.<customersDomain>.com, it does the CName look-up, until it finds a host name of the form <appEngineAppId>.appspot.com. It then sends the server request on to that App Engine application, ideally including the whole CName "chain" as a special CGI variable, so that the application can determine the user ID of the customer that owns the domain.
(And if the App Engine server doesn't find a host name for an App Engine application, it returns 404.)