March 10 (Bloomberg) -- As newspapers hemorrhage money and cut staff, the future of the industry is playing out in the suburb of Maplewood, New Jersey.

Internet sites have started blanketing the town with press coverage, with a new Web venture backed by a Google Inc. executive battling two locally run Web pages for readers. The New York Times joined the fray this month with a Maplewood blog. Their prize: online ads from local companies -- the fastest- growing source of revenue for the news business.

Maplewood is a testing ground for so-called hyperlocal sites, which provide a tighter focus on neighborhood news and businesses. The showdown -- one of the first post-newspaper newspaper wars -- is a boon for Dan Richer, a pizza-parlor owner in the town of 23,000 outside New York City.

“All of them interviewed me,” said Richer, 28, who runs Arturo’s on Maplewood Avenue, the town’s main street. “Isn’t that great?”

More local content means Web sites can sell more local ads. That category of advertising will grow 5.3 percent to $7.1 billion this year, said Kip Cassino, research director at Borrell Associates Inc. in Williamsburg, Virginia. That’s what drew the New York Times blog and Patch Media, the startup backed by Google Senior Vice President Tim Armstrong.

National Slowdown

“Demand for local Web ads is rising while the market for national advertising is receding,” Cassino said.

This four-way fight over Maplewood is beginning even as newspapers wither. Denver’s Rocky Mountain News closed Feb. 27, and Hearst Corp. has threatened to shut down the San Francisco Chronicle if the paper doesn’t cut enough jobs. That would make San Francisco the largest U.S. city with no major paper.

Maplewood’s local daily, the Star-Ledger of Newark, reduced its editorial staff by 40 percent last year using buyouts, a bid to stay in business. That’s limited its coverage of Maplewood.

The Ledger didn’t write a story when the town’s mayor quit in December, said Joe Strupp, who covers newspapers for Editor & Publisher and lives in Maplewood. He got angry and started the Maplewoodian, a blog to cover local politics.

Political corruption has plagued New Jersey for decades, with one scandal forcing the governor to resign in 2004. Former U.S. attorney Chris Christie says he successfully prosecuted more than 125 state and local politicians.

“If New Jersey government isn’t covered, that worries me,” said Tina Kelley, a New York Times metro reporter who runs the paper’s Maplewood site. “New Jersey government has a history of needing to be watched.”

Broader Expansion

Patch Media has ambitions beyond Maplewood. The New York- based company plans to open dozens of local sites this year. It started with Maplewood, along with nearby Millburn and South Orange, because the towns have high incomes, downtown shopping districts and Web-literate professionals, said Chief Executive Officer Jon Brod.

Patch’s strategy is to hire a reporter for each town and then bombard the community with business listings, sports scores and local news.

The New York Times’ site, which began covering Maplewood on March 2, is a blog run by Kelley and several interns. It’s soliciting posts from other local bloggers who want to reach the Times’ audience, she said.

Wait and See

The Local, the Times’ local-blog network, also is covering parts of Brooklyn and areas near Maplewood. The paper is waiting to see how these initial efforts work before expanding, spokeswoman Diane McNulty said.

On Maplewood Avenue, businesses are basking in the newfound attention. Words Bookstore owner Jonah Zimiles got heavy coverage for a recent reading by former New York Governor Mario Cuomo. He was even invited to blog for the Times. Maggee Miggins, who owns a realty office near Arturo’s, got an interview with Patch.

Kelley, a co-winner of the Pulitzer Prize, is betting her career on helping the Times adapt to a new era. To generate local interest, she’s publishing police-blotter items and hitting up her second-grader’s art teacher for drawings to post online.

“It’s a way to help get out of the mess the newspaper industry is in,” Kelley said. Hyperlocal reporting takes her trade back toward the 18th-century days of town criers, she said.

Still, local news sites have failed in the past. Take Backfence.com, a venture backed by EBay Inc. founder Pierre Omidyar. That company built 13 hyperlocal sites outside Washington, San Francisco and Chicago and burned through $3 million before closing in 2007, co-founder Mark Potts said.

Balancing Act

The problem was keeping costs low while still providing full coverage of small communities, he said.

“I see a lot of the same concerns at Patch that doomed Backfence,” Potts said. Patch may need to make each reporter cover two towns, not one as Brod plans, he said. “The market is there, but no one has made it work yet.”

Ken Doctor, an analyst at Outsell Inc. in Burlingame, California, agrees. He calls the hyperlocal market a “graveyard of dreams.”

In Maplewood, the crowded market may make it tough to charge much for ads. The Star-Ledger and the local weekly newspaper, the News-Record, add to the competition.

The fourth local site is called Maplewood Online. Jamie Ross, who has run the business for 12 years, charges $299 a year for banner ads and $149 for business-directory listings. Patch offers ad space for as little as $5.

Seeking Alternatives

Armstrong saw the need for Patch after having trouble finding volunteer opportunities in Connecticut, Brod said. Thousands of communities need an alternative to Yellow Pages ads, and they want information that promotes civic life, he said.

“Local information is the most important,” said Brod, 37. “It’s where you spend your time, send your kids to school and pay your taxes.”

Google has no direct connection to Patch. Armstrong isn’t involved in operations, and Google owns no stock in the business, Brod said. Patch offers display ads, not ads linked to search results, a market Google dominates.

Armstrong’s investment was approved by company lawyers. He declined to comment, Google spokeswoman Ellen West said.

Patch has carried stories about the best bagels in town, car thefts and a local musician appearing on “Saturday Night Live.” There also are photos of kids playing in the snow and information on commuter delays.

“We’re so much more than a blog,” Brod said. “Our costs are a fraction of traditional media’s. Profitability is something we’re very confident about.”

To contact the reporter on this story: Tim Mullaney in New York at tmullaney1@bloomberg.net

Last Updated: March 10, 2009 00:03 EDT