The basic idea is good, but I don't think reserving the last couple of digits is enough to preserve user privacy. Instead, they should encode location information using a method similar to the "location server" Openwave Systems was trying to see a few years ago, the "Location Enabling Server" (Google "openwave location enabling server").
Of course, I realize it cannot be exactly the same method, since the whole point is that DNS inquiries be resolved quickly (among other reasons). But the key idea is sound, and should be quite applicable here.
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