Problem is the "selective" market space. You know, every channel that satellite service provider beams up to the sky, is occupying certain bandwidth, which, otherwise, can always be used for something more profitable, which is something that the provider has a finite supply of. So, let's say they provide free (adv. supported) local channels to Los Angeles, 5 total channels, it might be sustainable by advertising. But the same 4 or 5 channels beamed for Boise ID, definitely, will not be.as profitable and will be the money pits. As a matter of fact, outside few select mega-metro areas of US, this is the case. So, since providing free channels to certain demographic (which probably needs them the least, due to the average income levels of residents living in these mega-metro areas), will bring wrath of FCC ov er them. They already have enough legal issues at hand and are better off without any additional ones in my opinion.
For the techies like me, and may be yourself too, it might be a boon to get local channels, crystal clear without paying anything and using that money to enrich my tech arsenal, but I know it will not make a lick of business sense to those at the helm of satellite companies. Heck, some people are getting sattellite to get clear local channels and whatever else is coming down n the beam is just the gravy. Give them free local channels and you will never see that income again.
Also, about the advertising revenue, Directv and Dish, just like any local cable TV provider, have a certain time allotted to them for "local" advertising in between shows. So, you pay a fee to watch those channels but they double dip by forcing you to watch commercials as well. So, why go down to a single stream of income while they can have two. Needless to say, with the progress in the DVR technology, I think, the conventional advertising is going in the way of dodo birds. WHy would any company invest in any technology on a dying breed of income streams ?