Had local newspapers held firm and implemented paywalls, a huge number of them would've gone out of business very quickly. 

I don't think that history bears this out. The Wall Street journal was an early paywall adapter, and they have been successful at it. The San Jose Mercury was one of the first newspapers to go online and originally had a paywall. They subsequently removed their paywall and went into a financial tailspin (I'm not suggesting that that's a cause-and-effect relationship, but removing the paywall certainly did not help them in the long-term.)