The best analysis I've heard of this is:

"Location is a much poorer indication of intent than Search."

Yes, but a combination of search and location will beat just search any day.

Only when location it is relevant.

I'd hazard that 95% of the time that I search, I don't care about location. Pretty much everyone will ship to where I am.

Here's the thing: I believe that location-based apps are more about pushing local ads to users than they are about providing services. While that remains the case, they will be a nonstarter.

I get pretty pissed off when my google search results come out in dutch just because I am sitting in an airport in Holland.

I'm looking forward to location based social networking. In the loopt trials, it was said that friends with loopt discovered that they were within a couple blocks of many of their friends even when they didn't expect it. I think if all my friends were running loopt or something similar it could change behavior in a positive way.

True, but there's a blurry line between local ads pushed on users and local services provided to users.

It only seems blurry when you're pushing ads; I think that users find it pretty clear.

I'd suggest that an example for "non-ad services" is CraigsList.

How often do you search for something and need to input your location?! Looking for a restaurant or something?

99.99% of your searches don't benefit at all from location.

I disagree. Location Based Services will never be that big. Simple fact is that we're not moving much so LBS uses will never be that great.