The New York Times reports that the new service is set to debut later this year, and will let users share their location in their status updates, as well as see the location of their contacts. This is not a new idea. Services such as Loopt and FourSquare have been doing the same or similar for years. Google also has its own version of location-sharing, called Latitude (and Buzz, too).
If you're tempted to ask what took Facebook so long to offer such a simple service that is already being offered by so many others, there's one big reason: liability. Look at the mess created by Google and its Buzz service. Google has already been hit with lawsuits over privacy violations. With 400 million users around the globe, Facebook can't afford to spark a user revolt if the deployment goes badly. It is with that in mind that Facebook is taking its time, and won't release the service until it believes it is fully ready.
We don't yet know how location information will be shared, how it will be viewed, or how users will be able to make use of it. It's safe to assume that status updates posted from mobile devices (and maybe even laptops) will be able to include location information without requiring extra effort on the part of the user. The feature will probably be opt-in -- meaning users have to purposely agree to share their location information. That alone should help stem some privacy concerns. Hopefully Facebook will be able to make it a simple feature to activate / deactivate from mobile devices.
Facebook is also going to make an API available to developers of third-party Facebook applications. This will let third-party apps get in on the location-sharing actions, too.
Facebook officially declined to comment on the matter, but made changes to its terms of service as recently as November 2009 with new language referring to location information. The new policy reads: "When you share your location with others or add a location to something you post, we treat that like any other content you post."
Let's hope so. And let's hope Facebook apps do the same.