Did the Demise of Newspapers Have to be?

Jeff Jarvis at BuzzMachine has an interesting commentary on how the Economist is succeeding while the majority of newspapers around it fail. His point is that being a quality publication allows it to buck the conventions of the Internet age (particularly the convention that everything must be free).

This point was also raised by David Simon (writer of the Wire on HBO and a former Baltimore Sun reporter) in an interview on Bill Moyers Journal. When they were flush with cash in the 1990s, rather than investing in themselves and alternative ways of monetizing their services, newspapers bowed to the pressures of corporate consolidation which drove them to cut corners to help boost stock prices.

In an interview with Michigan Radio today about citizen journalism, MSU professor Stephen Lacy talked about how newspapers can't be hyper-local (which has prompted the rise in citizen journalism - to cover what is being neglected).

My question is - why can't establishment newspapers be hyper-local? Why does each one have to expend its resources trying to cover all of the world/national news as though there aren't dozens of other outlets doing the exact same thing in the same market on any given day?

What if ... newspapers invested in doing a good job catering to the niche right around them (instead of pumping their papers full of baldly-edited wire service stories and syndicated content)?

What if ... instead of aiming broadly with one huge metro edition, the newspapers put their regional editions on steroids and crafted a newspaper around the interests/news of a particular community (going so far as to only discuss national/world matters as they pertain to the hyper-local community)?

What if ... instead of trying to compete with the Internet, TV and Radio to break stories as fast as possible, newspapers concentrated on their traditional strength: depth (and tweak that by offering a customizeable local news experience for each user that would help recommend content via some Amazon/Netflix-esque engine)?

Maybe someone smarter than me has already asked and answered these questions. It just seems that there's a lot of opportunity out there just waiting to be harnessed with a little innovation and some heart. Are there seriously no opportunities to seize upon with iPhone/Blackberry apps, or Kindle licensing? No opportunities to sell highly-targeted ads like Facebook and Google?