There are a set of multi-player games that currently use this capability on the iPhone in a fairly non-intrusive way. iMob, iKnight, iVampire, etc. They are all the exact same game, with the graphics and terminology changed.
Anyways, they use the location feature to connect you with other players in your general area. You can invite them to your 'guild' and that's pretty much the end of it. The game doesn't give away your location, only that your within a few (probably hundred) miles of X player.