Except that producing your own stories is more expensive (unless you want to hire middle schoolers), and you need something to put in the space between the advertisements. I agree that a newspaper that actually fills its niche well is desirable, but it's unfortunately a tough business model.
Frankly, I kind of suspect that local news will eventually be dominated by passionate bloggers. They don't have the overhead that a newspaper does, so they can deal with smaller budgets. Every community in my area has at least one local blog, and honestly, they're great for local news.
I imagine there must be some interesting business models (or sustainable non-profit model) for harnessing local bloggers and print media. I follow an awesome local blog about my city government. The blogger is SUPER passionate and documents all the local issues and city council meetings. My local newspapers cover few of these local issues, issues that problem more directly affect people than the national crisis of the week. Fortunately, a local paper hired (?) the blogger to write (or syndicate) her content for their paper (dead tree and website).
Frankly, I kind of suspect that local news will eventually be dominated by passionate bloggers. They don't have the overhead that a newspaper does, so they can deal with smaller budgets. Every community in my area has at least one local blog, and honestly, they're great for local news.