What we mean by the blurring of the magic circle is that: 1) the game is no longer entirely determined by its rules alone but rather affected by external influences and 2) the game's influence is no longer limited to its participants and the area of the magic circle. When we were discussing how the meaning of places changes for geocachers, we were talking about the second point. Ditto for discussion on sub cultures emerging around games. This time we're going to talk about point one. It's quite convenient for me to start with something familiar: geocaching.
If any game is highly affected by the environment where it's played, geocaching fits that definition. Caches are hidden into the environment. The play experience of hiding a cache is defined almost entirely by the physical environment: what are the possible places to hide, are there any interesting terrain challenges available, etc. Similarly, the play experience of seeking a cache reflects these environmental influences. This is largely expandable to any game that takes place in the real world but especially true for games where the arena of play is not involved in the game's design. A live action roleplaying game that is bound to a certain area can be designed with full knowledge of the playing area. Geocaching as an overall game cannot.
If we get back to the magic circle, in the LARP example the magic circle is still effectively closed. The area is bound, the game is played within a certain time frame and people inside the playing area are all participants in the game. LARPs that are not bound to a certain area or time frame are different, and indeed they come closer to what we call alternate reality games. The concept of the magic circle becomes more blurred in these cases. In a sense, a geocacher is always inside the magic circle. However, it is clear that they are not constantly actively participating in the game. When I'm seeking a cache, I have the intention to play, and therefore I am in the game. When I do not have the intention to play, my actions nevertheless affect my performance in the game.
This might need some clarification. Suppose I am playing two games: one on my Playstation Portable, and then geocaching using my navigator. If I choose to travel to Helsinki on a weekend, I can take both of these games with me. However, when I power up my PSP and resume playing a game, the state of the game has not changed due to my being in Helsinki. Geocaching on the other hand has definitely changed: I now have access to caches hidden in Helsinki, but not to caches hidden in Oulu, even though that's where I "signed off" from the game. I have traveled inside the game's world without active participation. From theoretical perspective, when I turn off the PSP, the magic circle effectively goes away entirely; this is not so with geocaching. The circle persists even though I choose not to be actively inside it.
So what's the significance? This: since the magic circle is ubiquitous in alternative reality games (and similar), what follows is that any action can affect the game world. Location-aware gaming is just the tip of the iceberg. Link in data from physiological sensors, or even brainwaves. Suddenly it becomes possible to make a game of everything if we so desire. We can skip points, leaderboards and badges - we can do much better than that. The tech is not so far in the future either and we can start with what is available now.