Counterpoints to your counterpoint: The New York Times is a) doing ok for now but not great [1] b) most importantly, the NYT is an American institution that is in a league of their own. Few newspapers have the prestige, quality and history of the NYT.
Not to mention that despite their paywall, anyone can still link to an article in the NYT, and people can read it for free (as long as they haven't read too many articles that month). The NYT seems to have realized that the links to them from all over the web are free advertising that they can't afford to do without, and that having lots of people discuss their articles on the web makes them more influential.
Prestige and quality may help the NYT be successful in charging for content but that doesn't mean smaller local newspapers will fail if they try the same tactics. Warren Buffet seems to think that the paper editions of local newspapers will not fail (especially in areas with strong community) and owns over 20 now. It seems likely that eventually they will just charge for online access and be successful at it.
[1] Stock price for NYT has gone down 80% in the last 10 years: http://www.google.com/finance?q=NYSE%3ANYT&ei=g9XhUJiAJ6...