A copy of The Times-Picayune which cut its print edition to three days a week earlier this year. Reuters

A few years ago, publishers and other media executives thought they’d found a partial solution to what ails the news industry in the age of the Internet. The answer was “hyperlocal.”

At a time when news spreads around the world in a matter of seconds, the logic was that community-specific information would become more valuable. Local communities, with their hometown newspapers suffering, still needed coverage of town hall meetings, police blotters, high school sports stats -- anything they couldn’t get on CNN or the Huffington Post. And if local communities needed it, advertisers would pay for it.

The idea was so compelling that AOL (NYSE: AOL) took a big bet on it in 2009 when it bought and -- two locally oriented websites -- for $10 million apiece. “Local remains the largest white space and offers us an ability to improve the lives of many consumers,” Tim Armstrong, AOL’s CEO, said at the time in an email to employees. “It’s a space that’s prime for innovation … .”

But that innovation has not gone as planned. Advertising revenue from local communities has been elusive, while the cost of maintaining Patch’s network of 863 community websites is larger than anyone imagined. According to a scathing critique released in May by a group of AOL investors, Patch lost $147 million last year against a paltry $13 million in ad revenue. “We do not believe Patch is a viable business,” the investors said in the report, according to Bloomberg Businessweek.

As it turns out, a business model for hyperlocal news is not as simple as honing in on a specific neighborhood and connecting advertisers with readers from said neighborhood. According to Tom Rosenstiel, director of Pew Research Center’s Project for Excellence in Journalism, who co-authored a recent report on local news consumption, the ecosystem behind local news is more complex than hyperlocal advocates had initially realized.

“One problem with hyperlocal is that the definition of local tended to be based on zip codes where people lived,” he said. “But in many communities, where you live is not where you work, or where you go to do your hobbies, and it doesn’t define all your interests.”

Moreover, Rosenstiel said, the profit margin for hyperlocal news is limited by economic logistics. “Hyperlocal is by definition somewhat limited in its appeal,” he said. “So if you make your coverage only about concerns in one location, you can shrink your audience rather than grow it. And the advertising you attract will also have potentially only local appeal, limiting how much you can charge for it. On top of that, the cost of covering a hyperlocal story isn’t that much less than covering a high-interest story.”

Released last week, the Pew Research Center’s report looked at how local news consumption varies by community type, focusing on the ways that residents in large cities, suburbs, small towns and rural areas compare in their levels of interest in local news. The report is based on a telephone survey of 2,251 adults conducted in January 2011. One thing the study shows is that interest in local news is universally strong; more than half of Americans indicated they follow local news “a lot.” The percentage is slightly higher for rural areas than large cities, but a strong interest is maintained across all the community types, according to the report.

The challenge, Rosenstiel said, is that local news traditionally began in local newspapers, which no longer have the advertising to support their communities in the ways they once did. Digital models of hyperlocal news, such as AOL’s, have filled the void, but a proven business model hasn’t followed.

And yet, despite elusive profit margins, hyperlocal news is no less vital to local communities. The question is how to monetize it in a way that sustains the age-old civic duty of community journalism. “Changing technology changes how the citizen’s need for information is fulfilled,” Rosenstiel added. “But the need isn’t really different. We still need to know what is going on beyond our direct experience, the things we cannot find out for ourselves.”