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I agree, Twitter has all the right pieces to make something of local.
Translation. Do what FourSquare should be doing, just don't suck at it.
Twitter's self imposed 140 char limit has limited their options in a lot of ways. Twitter should have dropped that a long time ago. Or at least not count hashtags, geotags, or urls against the 140 limit. This would've opened a lot doors to add more context to tweets.
This didn't deserve to be downvoted. The first sentence (while perhaps obvious) is both true and relevant.
It also bugs me that @refs count against the limit. When I come across 3 developers having a conversation and I'd like to chime in, I'm already down to <120 chars just by including their names. And since Twitter's model means they can't reasonably find out about my tweet if I don't put their name in it, the more people you want to talk with, the less you can say.
You say that like it's a bad thing.
That's because it is.

Going from blog posts and mailing lists to 140 character messages was a real change in communication. Going from 140 characters to 110, because a couple of people have long twitter IDs, is just being a pain in the ass. I already compressed the point of my message to 140 characters, why isn't that good enough?

Mm... Fair point. It just seems like another fundamental change to allow twitter messages to go to >5 people at a time. What would be the limit then? Ten people? A hundred?

Maybe limiting the number of people at all is a bad thing. Who knows.

But messing with their Formula That Works may be a bad thing.

Yes exactly. In a more broad sense I think all nouns (people, places, urls), should not count against the limit.
The most important thing about local tweets is that you can refine search results to your country/area. I just tried, on the website and on the iphone app, I couldn't.
Refining search to your current location seems to work in the twitter android app. I just found out about some senior class trip and a guy looking for a beach with parking in South Lake Tahoe.