In an answer in the comments section on Dec 12 Susan Moskwa from G (I checked) says:
"JJ, if you want visitors in both Canada and France to see your French content, you should not set a geographic location. Note that the tool handles *geographic* data, not language data. A good example of where it would be useful is for a restaurant website: if the restaurant is in Canada, it's probably not of interest to folks in France. But if your content is in French and is of interest to people in multiple countries/regions, there's no reason to restrict it.
It's working for sub-directories actually, not sub domains.
Each sub directory is called the country code - /uk/, /fr/ etc.
Each country site is in target language and includes things like local office addresses etc.
No noted impact on traffic yet, but we're only on day 1.
Some very noticeable issues with dupe content filters. We have a large dupe content issue which is being worked on, but the wheels turn slowly. Dupe filters on 'pages from' exhibit different behaviour. Either that or it's an issue with what is currently indexed as 'pages from'.