In coastal Maine, community journalism has been running on parallel tracks in recent years. On one track, an aspiring publisher buys a chain of community papers with a centralized printing operation. He begins sharing more content among the papers, cutting staff, even closing one of the weeklies, a paper that had been published continuously for more than a century. This is the familiar narrative of newspapers in crisis.

On the other track, an entrepreneur develops a pioneering, Web-only, small-town news site, planning to sell the template for use elsewhere. The site racks up millions of hits, the entrepreneur wins a Knight Foundation grant of nearly $900,000 to upgrade and distribute his software, and his company is one of just five news operations described as promising by the foundation’s president during a May 2009 Senate hearing on the future of journalism.

So far, so good—the dinosaurs flail and the visionaries sail. But here’s the kicker: both of the above stories refer to the same operation, VillageSoup. And a closer look at the VillageSoup narrative complicates this simple story line and reveals an awkward truth about this moment in the digital media revolution: print still pays the bills.

Richard Anderson, the VillageSoup founder and CEO, says his project began in 1997 when he came to Maine flush with a fortune earned through Ligature, Inc., his innovative textbook-publishing business. He saw the future of news on the Internet and launched a hyperlocal news outlet in Camden, a small town on Penobscot Bay. Anderson hired a team of journalists and expanded into Belfast, in neighboring Waldo County. He transitioned through several names—Village Green, Ligature.com, clicK2BHere, and K2BH—and experimented with a paywall.

By 2001 Anderson had settled on VillageSoup as the name, and free access as the strategy. But he had a major problem: he was losing lots of money. Anderson saw that advertising money was still flowing to local weekly newspapers in the area. So in 2003 he launched his own print weekly, the Knox County Times, to compete with the Camden Herald and the thrice-weekly Courier Gazette in nearby Rockland, both owned by Courier Publications. The newspaper served as a weekly digest of VillageSoup’s online news.

The next year, Anderson decided to also get into the newspaper business in Belfast, which had two competing weeklies: the 180-year-old Republican Journal, also part of the Courier chain, and the independently owned Waldo Independent. Anderson tried to buy the Independent, but the Courier publishers out-bid him. So Anderson launched his own Belfast weekly, the Waldo County Citizen. By 2005, the five papers that had long served Knox and Waldo counties (not including the Bangor Daily News, with a Belfast bureau), had grown to seven.

Meanwhile, VillageSoup’s online format evolved into the model it retains today, a three-column Web site that Anderson considers more than a simple news site—he calls it a “community host.” The left column is traditional news; the middle column is user-generated, including “bizBriefs” from member businesses and bloggish entries from individuals; and the right column is traditional advertising.

Businesses pay $20 a week to post on bizBriefs, and Anderson calls this an innovation. “What we have a lot of, that no other newspapers have, is a lot of Main Street businesses paying us a little bit of money to be able to post their information on our front page, unfettered and unfiltered by us. That’s not a banner or a button, this isn’t display,” he says. Businesses post items on topics ranging from the menu of the day to the dental dangers of oral piercing. Anderson says, “We’re giving the small business the ability to continue doing what they do best, and that’s to serve.”

The business-generated content impressed the Knight Foundation. “What we found interesting was that advertisers also became part of the community,” says Marc Fest, the foundation’s vice president of communications. “Advertisers were also able to use that content management system.”

In 2007, Knight awarded Anderson an $885,000 grant to update the VillageSoup software and create on open-source version. This would allow others to launch community-host Web sites without paying a licensing fee. (The open-source software is available for download, but Anderson and Fest say they don’t know if anyone has applied it, and they are not tracking its use.) Concurrently, Anderson developed a premium version of the software to market to VillageSoup franchisees, under the name VillageSoup Common.

But as Anderson was collecting kudos as an online news pioneer, VillageSoup remained in the red. And by launching two newspapers, he had made the already competitive news market in Knox and Waldo counties even more crowded. “Even after we created the papers we still continued losing money,” says Anderson. “And that’s when we came to the realization that there were too many papers—there were seven newspapers serving 80,000 people. We had to rationalize the market, we had to get fewer papers in this market, because advertisers can’t support them all.”

Anderson’s solution was to purchase the Courier newspapers. The 2008 deal included the Rockland, Camden, and (two) Belfast papers, as well as weeklies in Augusta and Bar Harbor. Anderson cut dozens of jobs and consolidated operations. In the shakeout, the three Waldo papers became one—using the venerable name The Republican Journal—and the Knox County papers were rolled into the Courier Gazette. That paper was soon renamed the Herald Gazette, and dropped frequency to twice weekly, after Anderson shuttered the Camden Herald.

Anderson says he had not intended to close the Camden weekly, which had been published since 1869. “But then when the economy got wiped out from underneath us, we had to start scrambling,” he says.

While Anderson searches for an ideal formula, Maine weeklies with less sophisticated online operations appear to be surviving, or even thriving. Mike Lange, executive director of the Maine Press Association, says of the twenty-one weeklies he represents (the Village-Soup papers not among them), “most are doing very well.”

Alan Baker, owner and publisher of the Ellsworth American and Mount Desert Islander (Anderson’s direct competitor in Bar Harbor), says his papers remain profitable. And he says the papers have even seen modest increases in circulation in the eight months since he put most online news behind a paywall. He feels the newsprint model still works well for most weeklies. “If we do our jobs properly,” says Baker, “we have a niche that’s secure for the time being.”

But Anderson says the old newsprint business models might not last. “I’m betting long-term,” he says. “You never know when it is going to turn. GM bet for a long time, and they lasted for a long time, without building high-quality small cars.”

While Anderson is now convinced of the value of newsprint, he also says VillageSoup earns 21 percent of its ad revenue online. “Because of our start, and our approach, we’ve achieved something nobody else has achieved, but it is still not enough,” says Anderson. “Eventually it may end being fifty-fifty, but I think, long term, that fifty percent of that ad revenue is still going to come from print. Print plays a very important role. It does something for advertisers that online will never do. And print does something for readers that is going to be hard for online to ever do.” He says his newfound devotion to newsprint is a major shift in his thinking that he did not anticipate thirteen years ago.

VillageSoup has not yet seen a profitable year, but Anderson is hoping that 2010 will be the first. He owns the company, and will not say specifically how much he has spent on the venture, but says it is millions. He remains enthusiastic about his news model. “We’re not done shaking this industry out yet,” he says.

And in the culmination of one aspect of his vision, Anderson launched the first franchise version of VillageSoup in January, in Wareham, Massachusetts. Wareham Week will go head to head with two established weekly newspapers. It will feature a Web site, of course—and a print newspaper.

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Murray Carpenter is a contributor to CJR.