This is tl; I expect most dr. Move along, then, nothing to see here.
If that's true, then do you have a theory for why newspapers, which have been racking their brains non-stop regarding this crisis, haven't latched onto the local-coverage solution?
The local/wire debate is not too far off from debates about organizing a team for programming software.
One end of the code spectrum is to write everything you need yourself. From the close-to-metal code to the UI, everything is written in-house. When well-funded and executed by a well-organized, qualified team, the result is solid software that's nearly self-maintaining. Each team member knows their role inside and out by working not only on coding the solutions but also calculating the efficiency of the algorithms, documenting code well and correcting errors quickly. QA catches bugs quickly, the coders stomp them out before it ships, the program is fast and resource-efficient, UI design is intuitive - but all these coders are expensive, and the best ones quickly get snatched up after a project, or even during one, by deeper-pocketed rivals.
On the other end is, I suppose, the stereotypical Visual Basic.NET style - using large libraries and off-the-shelf solutions. Taking this route is easier and doesn't require a large group of coders. Programs can be written quickly at relatively a low financial cost by a smaller team - hell, you can even outsource much of the work. However, the software can be horribly resource-inefficient, requested or needed features are missing or slimmed down, the UI is clunky or overwrought, and bugs are rife.
Most development philosophies fall somewhere between: a team of coders will write much of what they need on their own, but certain complex or tedious parts of the program can be handled by libraries or delegated to subcontractors/outsourcers. A game might be written by one company except for the 3D engine; a developer may hand off database backend development while taking care of the forward-facing application. Everything comes down to the budget, which is driven by a desire for profit.
Now, let's frame the news business in a similar fashion.
One end of the news spectrum is the local-first approach. From the legwork to find out what happens behind closed doors - stuff that won't ever get published, but gives a reporter context and angles for stories that aren't obvious from just the press releases and meetings - to the grip-and-grin photo ops, everything is written by in-house reporters who work a beat. When well-funded and executed by a well-organized, qualified team, the result is solid news reporting with strong contextual background that's simple to understand without oversimplifying. Each reporter knows their beat inside and out by working not only on writing stories but also gaining the trust of reliable sources, taking and archiving copious off-the-record and unpublished notebooks, and staying in contact with reliable expert sources to correct errors quickly. Copy editors also catch errors quickly, the managing editors help stomp them out before it prints, the story is tight and concise, paginators lay the story out attractively and add appropriate art and graphics - but all these employees are expensive, and the best ones quickly get snatched up after a story, or even during one, by deeper-pocketed rivals - corporate-owned newspapers, news wires, even PR firms and politicians.
On the other end is, I suppose, the stereotypical Gannett corporate newspaper - recycling press releases and using wire services. Taking this route is easier and doesn't require a large newsroom staff. Pages can be produced quickly at a relatively low financial cost by a smaller team - hell, you can even outsource much of the work, like Gannett is doing or planning to do with reporting, copy editing and pagination. However, the stories can be horribly written, lacking in context, missing important information that's relevant to readers, cut down to make room for more ads, with lazy design, crappy photos, lots of references to flashy but often even less-informative photo galleries and videos online, and many factual errors.
Most newsroom philosophies fall somewhere between: a team of writers and editors will produce a fair amount of local content, but print space falls prey to fillers, wire content, and empty local content, like social pages and advertorial. A local business story might just be a wire story with a few local quotes added; a reporter might be told to spend only enough time to flesh out details from a press release. Everything comes down to the budget, which is driven by a desire for profit.
Here's where it forks, perhaps: Most newspapers, and especially most corporate newspapers, expect a profit margin that far exceeds that of a software company. If a newspaper only has a 10% profit margin, there's layoffs/hiring freezes/cut hours/cut benefits coming. Lower pay, declining benefits and fewer jobs in newsrooms send the reporters who want to put an effort into their work out of the field completely.
The few newspapers that are still successful today are small, privately owned, and nimble and aware enough to change and adapt. They take care of their staff, train them when it's wanted and needed, give them opportunities to advance and treat them with some decency. That's the theory for success, and the reason it's not being executed isn't that it's not a successfully tested theory, but that it's not feasible to execute at most U.S. newspapers that are owned by publicly traded companies driven not only by profit but also profit growth. Those things haven't been favorable for newspapers since, as you note, Craigslist and other Web-based services came in and made newspaper brands worthless in the online ad space.
Even if poor local coverage is an area where newspapers can get better, it may not be enough. Papers are also hurting badly from the loss of classified ads, real estate listings, and car ads, all of which are migrating to the web (i.e., craigslist).
That's all true. But Craigslist is barely moderated, and this is where newspaper ad departments can compete: If they can provide an ad service that's competitive in features and also well edited and moderated - cutting the chaff and promoting good deals while establishing a community around its news product - they can deliver value to the end user. This is what old-guard news publishers have trouble grasping - that the product even their readers want most are the advertisements, because they provide tangible financial value to the end user. The news part of the newspaper always worked because it establishes and reinforces the sort of community most blogs would kill to monopolize - reporting on and promoting local sports, schools, businesses, residents, people, the community. Breaking down barriers between people and exposing problems that people can rally together to beat, that sort of good old-fashioned sort of stuff that only comes from a staff that isn't rotated around the nation every three years, with so much of that time spent learning Avid and inputting calendar entries instead of working beats and becoming part of the community they cover.
The news always was the wrapping for the ads, which in turn funded the news. It's symbiotic. Corporate ownership tried to break this loop by carving up newsroom budgets, and the public rebelled against the ad-heavy, low-quality crud that came out of it. Even as middle- and lower-class America became comparatively stupid compared to their equivalents in past decades, what corporate news throws at them sets off even their weakened bullshit filters.
Gannett, for instance, tries to push to its local newspapers the USA Today model of flashy, art-heavy, low-content pages filled with small bits of news instead of community-reinforcing features. Their reasoning is that USA Today is still the nation's most financially successful newspaper. What Gannett doesn't get - same as most every corporate news organization that models itself after Gannett - is that USA Today is about even with People magazine in cultural value to people, and it's cheaper on the news rack. That's why it sells. But that model applied locally results in an empty paper no matter how many words get crammed on the poorly-designed page templates. The paper devotes 10 pages to social climbers, 12 pages to local entertainment, and maybe 4 or 5 fractured pages to local news. Reporters get moved around departments, required to learn video and podcasting during their work time - yes, these are valuable skills, but not at the expense of reporting the news to put into the videos and podcasts. Readership plummets. Gannett says local news is a failure and puts more wire news in the place of the local "news", and the readers just give up and look to TV, which has gotten even more shallow since the bleeds-it-leads 80s and still manages to outclass this shelled out paper.
The newspapers that really win support from their communities take on the community's problems, hoist heroes on their shoulders, and know well enough to tell when troublemakers try to masquerade themselves as heroes and vice versa. Those are vanishing. Their only hope is that this economic bottoming-out divests corporations from news, and the vacuum of publishers gets filled again by entrepreneurial newsmen with a grasp on the Internet and community building, and not the popular idea of non-profit organizations, which can be founded or easily overthrown by wealthy special interests and lobbyists and become as abusive in their powers as politically driven "family" owners (Blacks, NY Times) or corporate interests (NY Times, Gannett, News Corp., KR, Dow Jones, etc.), or the even scarier idea of further corporate consolidation.