Don't get me wrong, I think that digital news is great but I'm not sure that the Internet is an adequate substitute. Newspapers are cutting staffs and reducing their size it's true. The Internet is inherently small though. The resources it can commit to a story are questionable in this sense.
Local newspapers on the other hand still leave something to be desired for all the resources they have at their disposal. What I'm getting at is that it is not clear which medium is best or if either of them truly meet the measure of journalistic excellence.
As it is, news in all mediums doesn't really seem to be carrying out much of its investigative tradition. Mostly it's copy and paste reporting. Journalists have been reduced to stenographers. And most news we read simply reports on events, not the political workings in our communities. Partially it may be the corporate news environment that has either debilitated the ability for reporters to investigate stories even create decent reporters. Likely it's some of both. Bill Moyers captured this sentiment in an interview in which he decried the complacency of big media in the run up to the current Iraq war.
The Internet has provided an alternative to the corporate media system in its wake. The role it plays in local news is unclear though. It needs to cover local events and politics in a trustful and responsible way if it is to replace the paper. And it must be clear that these news sources are doing authentic journalism by seeking out the truth to its utmost.
Democracy will continue on as it has without the paper but the state of local news coverage and government is questionable. If the Internet can fill the void and exceed it, perhaps in ways not yet realized, then newsprint's time may have come. It won't be an easy obituary to read though.
Further resources:
http://www.slate.com/id/2214724/
http://pewresearch.org/pubs/1147/newspapers-struggle-public-not-concerned
http://adrianmonck.com/2008/12/democracy-collapse-journalism-provide-political-information/