Prospero, according to McGinn, arranges for the tempest, the romance between Miranda and Ferdinand, and generally everything that happens to all the other characters as a piece of dramatic art, as a fiction. (To use the terminology of this blog, these episodes are instance of unreality; among the various forms of unreality, they would be classified as fictional.) The storm that wrecks the ship in the beginning of the play, then, "was just a performance, giving only the impression of catastrophe, from which all the actors emerged unscathed. [...] The actors didn't know the storm was essentially fictitious, and so performed their roles with authenticity, but all along it was just a piece of make-believe." (Ibd.)
I think this interpretation confuses the way the different forms of unreality work. It's true that fiction is a game of make-believe, but it's a game that is played with asymmetric roles: there are the author, director, and actors in one kind of role (pretending to do something, performing), and the audience in another one (pretending to believe — suspending disbelief). If you and I, for example, perform a scene with a car crash on stage which we both survive, and an audience watches that performance, it's our job (yours and mine) to pretend being shaken and thrown around and the job of the audience to pretend to witness a car crash.
But note a couple of things: first, it makes sense to ask whether the characters survive the car crash in the fictional world of that scene, but it doesn't make sense to ask whether the audience gets hurt. The audience is not in that fictional world. They're only pretending to watch it. The audience, to put it somewhat differently, is apart from that fictional world. Second, in order to suspend disbelief, the audience must be aware that it's a performance that is going on, that they are presented with fiction. Fiction as a game of make-belief works only if you know that it is a game and yet play along. If you're not aware that this is what happens, it's no longer fiction, but deception (or perhaps, in some cases, illusion).
Now ask yourself who Prospero's audience is when he stages his fake storm. Is it Shakespeare's audience (the people who sit in the theatre and watch the play), or is it the group of travelers on the ship? I think it should be clear that the other characters in the play, though subject to deception and manipulation, are not the audience of a fiction. They are confronted with what is, in their world, an instance of unreality, but they're not suspending disbelief with respect to it, they actually believe in it. The travelers on the ship believe that they are caught in a storm, they're not pretending to witness a storm as if they were an audience watching it on television. In other words, the travelers on the ship are in the same situation as the characters are that you and I play in our car crash scene. In their world, what happens is a storm (or a car crash), and they have good reason to think of themselves as being in that situation. Their world is more complicated than the world of the car crash scene, of course: the storm isn't real, but a deception. (Thus it's a case of nested unreality: a deception within a fiction.) But that doesn't put them in the position of a fiction's audience. It puts them in the position of a deception's target.
It seems, then, that the audience in Prospero's drama cannot be the other characters, but it must be the audience of Shakespeare's play. But then it isn't correct that, as McGinn writes, "Shakespeare is introducing theatricality into the lives of his characters" (144). Prospero's words may be reflections of the playwright put into the mouth of one of his characters (and McGinn quotes some lines which make this plausible), but it doesn't follow that Prospero's machinations make the world of the other characters into a stage. Miranda and Ferdinand don't experience their own romance as if it was a fiction (compare with Theseus and Hippolyta watching the romance of Pyramus and Thisbe); the travelers on the ship don't experience the storm as if it was a show (compare the staged murder Claudius and his court watch). They're subject to deception, not audience to a performance.
(As a side-note: if the audience of the spectacle of the tempest is not the cast of characters, but the theatre audience, then it's also a little imprecise to speak of the tempest as "just a performance, giving only the impression of catastrophe, from which all the actors emerged unscathed." If you're sitting in a theatre audience, it's of course just a performance, and you don't expect the actors to be hurt. On the other hand, you can still ask whether the characters in the world of the play were hurt or not: did Alonzo and friends survive the storm, did your character and mine survive the car crash? And that it is just a play doesn't determine the answer to this question. It simply depends on the plot. The plot might be so that they survive; the plot might be so that they get killed. Both outcomes are consistent with the whole thing being a drama.)
 Colin McGinn, Shakespeare's Philosophy. Discovering the Meaning Behind the Plays. New York: Harper 2006.