We've launched our first location-based game (swordfish) a couple of months back using the ideas that you are thinking...

www.blisterent.com

The game itself is getting a lot of support along with the idea of creating virtual worlds from real worlds. We are also in the process of testing our geo-spatial multi-player engine to host more games.

As with anything there are problems with the technology, but  with a compelling gameplay you can work through any of the issues.