There is some demand for local news on the part of readers, though, which is what causes these papers to survive (and be able to sell ads). The newspapers aren't really producing the highest-quality output, but they retain some readership, because some number of people want to read about what happened in their 80,000-person town's city council meeting yesterday, what the sirens around 3rd and Main were all about, etc., etc.
I haven't yet seen a startup tackle that aspect, of producing some kind of local information source that people will want to read. It's at least a demand-side problem, in that a lot of people want that information, and current information providers are producing a fairly low-quality version of it. Whether it's monetizable, I suppose, is another story.
My anecdotal and experiential evidence says that while there are people who want that information, it's a pretty small number so you can't exactly make money directly from them.
And the people who look at that info have zero intent to spend money, so advertisers have zero interest in appearing alongside it.
The other thing is that the bigger newspapers made a lot of money through national advertising, sales sections and deceased notices. These things are becoming less relevant. With Craigslist and Facebook etc.
He's probably hoping that investors dump their whole newspaper portfolio and he can pick up all the profitable smaller papers while selling the bigger ones such as the Tampa one at a short term loss as part of the long term plan.
He wrote a good article about end of life businesses and how they can be a good investment, but not to reinvest money into them. I'll have a look and see if I can find it.
Local newspapers
AOL is making probably the biggest concerted push at the moment with its Patch platform. It's an interesting idea, but probably still to soon to say how everything will turn out...
Are there any startups tackling the local news problem?