Actually, the internet connection is not
used by the iPod Touch to determine your location. It is only needed for access to Google Maps so it can give you a view of the place.
The location is pinpointed through the wireless IDs of WiFi access points within range. It would even work if none of them had actual internet access (except the one that lets you load the maps) since you normally won't be able to log in to most of them. But your iPod Touch can "see" their wireless IDs even without having access to their respective networks.
Apple has licensed the Skyhook
technology for that purpose. It works through a registry of wireless access points with their respective locations. If the owners of the access points move to a different place it can affect the location service until the location is updated in the database. In my place it works perfectly, but especially in more rural areas it may not, or where there are only new access points which aren't registered yet.
The iPhone uses three ways to determine its position:
- WiFi (Skyhook)
- cell tower triangulation
The iPod Touch only has the first option available:
Apple - iPod touch - Features - Maps