i think that its possible. i don't believe that many of the local papers are run as effectively as possible -- most are probably not run by business-oriented people, but by people who are popular inside the community (or at least, ours was and so were the ones in the general area).

they probably do scale, it is probably more likely that the same problems we're seeing with larger papers are happening with smaller ones. they're not keeping themselves modern with respect to technology and business practices.