In fact, it uses several mechanisms.
- GPS
- Cell tower triangulation
- Wifi Hotspot Cataloging
- Accidentally assuming you are in Cupertino
There are trade-offs based on speed, accuracy and affordable equipment. The first Gen iPad will have only 3 options, while the iPhone simulator uses the latter mechanism.
You can observe the difference in these systems in the map application, where he initially guesses based on the cell of the tower, and then clarifies the guesses via GPS.
Only parameters # 3 require a data connection.
And for the faint of heart, including No. 4, it was not absolutely serious, although this is functionally correct. (I think they mimic GPS location reporting, and not just hardcode it, but I did not check.)
Ukko
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