This sounds like a manifesto for UrbanVancouver. I can tell you that in Vancouver because the local broadsheet newspapers have bad websites with only a portion of their articles online and links that rot quickly, the web diet of the average under 40 Vancouverite doesn't include the local broadsheets, Vancouver Sun, Vancouver Province, etc. [ I would link to their sites if they actually had sites worth linking to!].
A newspaper may be a dominant media brand in its community, with boxes on every street corner and a wad of newsprint plunked on a third of the doorsteps every morning. But what is its share of its community's Web diet? I don't know what things are like in your home market, but here in the Bay Area, the big three newspaper publishers are competing with a host of free dailies the do a better job of covering individual communities than they do. By associating yourself with a constellation of neighborhood and community bloggers, most online newspapers could serve their community better.
And why on Earth would any publisher want to host blogs? Why put up with the liability, support headaches, creeping editorial responsibility, and general managerial overhead? That's so ten years ago! That's why God gave us Tim Berners-Lee. Anybody can create a Web site. And the (minimal) hassle of setting up a blog filters out the folks who'd never maintain a site in the first place.
If newspapers are going to survive, they're going to have to get local in a hurry. Why is the A section of most newspapers national and international news and the B section local news? That's backwards. And local news is even more important on the Web. People are going to the local daily for local news. And they should be going there for other links to the community.
On the Web, focus matters. And newspapers should be focusing their site on local news. When I built Coastsider, I worked hard to link to lots of local sites. This was as much about necessity as strategic vision. But I also know that this is going to come back to me in reputation, audience, and revenue. Every newspaper in the US should be aware that this kind of online community building is already taking place in their home markets. They either can surf this wave or be swamped by it. There is no other option.
On the Web, more even than real life, your reputation is your fortune. It's the source of your network and the your network is the source of your customer base. Branding on the Web isn't about advertising. It's about reputation. It is your karma. Google, Yahoo, eBay, Amazon have translated good karma into big money and there's no reason why newspapers can't do the same.
Be a good neighbor: Think locally. Act locally.