I see this episode as the creator's of this show saying "thank you" to the fans. It is the last "normal" episode before the finale, the last chance to insert any messages before the big bang. And really, this episode fulfills three main purposes: Make the audience laugh, recap the show, and make the fans feel right at home.
In its first purpose, this episode is a lot like 'Nightmares and Daydreams'; it creates a balance of emotions throughout the show, and presents a light-hearted mood before two hours of seriousness. But it also deals with some unresolved issues that have to be touched upon before the finale, if for no other reason than to make them recent. Things like Zuko's redemption towards his uncle, Suki's integration, and Aang and Katara's relationship come to mind.
In its second purpose, the episode does a good job just summarizing the story up to now. Of course, with more than 20 hours stuffed into less than 20 minutes, the summary can only be brief, and only skim over the most important things. But it still helps to bring back all the episodes that have come before, and to present the events in a new light. With this episode, the show is, in a way, parodying itself, showing the characters in their flaws, picking on several weak or confusing spots in the various episodes. And this is where the third purpose comes in.
Truth be told, this might not even be a purpose, but a consequence, but still, fans who have followed the series and discussed it with other fans will quickly recognize the various pointers this episode shows, and will get many of the inside jokes. Making fun of Zuko's honor, the heavy jab at Zutara, the questionable circumstances surrounding Jet's death, the meaninglessness, so to speak, of 'The Great Divide' - all of these are things that fans have discussed, and which are now presented, comically, almost as a way of mocking the fans and the show in a light-hearted manner. It's lots of little jokes mostly for the fans, and I guess that, in a way, it creates a sense of understanding between the creators and the fans.
That is not to say that this episodes doesn't have serious bits as well. The most serious one might be Aang and Katara's talk about their relationship on the balcony. I was very glad that after six episodes of nothing on this matter, it gets brought up again. And even though there is not too much development on it, it's just nice to see that the two of them are thinking about it.
Next to all the fan service (in terms of familiarity), inside jokes, plot recap, and character development, there is one more aspect about this episode that I have enjoyed tremendously: The special effects on stage. The black-clothed stage helpers, the ribbons for firebending, the make-up effect for the Avatar State, they all added a very nice touch to the play itself. Being used to bit flashy effects on the show, it's nice to see the inventiveness and intelligent prop use. In fact, they reminded me a lot of genuine Beijing Opera effects, such as the miniature glider.
So while 'The Ember Island Players' is a jumble of many things with no clear focus, it does its job well, and has an added bonus: The "alternate" ending to the show, in which Ozai rules supreme, is a great note to end this episode on, because right at the end of a light-hearted story, it shows both the characters and us just how dire the situation really is, and is a slap across the face for everyone to wake up in earnest. A great ending to a great episode.