The thorny way forward is suggested, again, by the music industry's trial-by-fire. Seth Godin is talking here about the book publishing business (h/t Andrew Sullivan), but I think the hard medicine would serve newspapers as well:
2) If everything is free, how is anyone going to make any money?
First, the market and the internet don't care if you make money. That's important to say. You have no right to make money from every development in media, and the humility that comes from approaching the market that way matters. It's not "how can the market make me money" it's "how can I do things for this market." Because generally, when you do something for an audience, they repay you...And you know what? It's entirely likely that many people in the chain WON'T make any money. That's okay. That's the way change works.
That's OK? It's not going to feel OK for a lot of folks. This next point beats a familiar drum:
The lesson from Napster and iTunes is that there's even MORE music than there was before. What got hurt was Tower and the guys in the suits and the unlimited budgets for groupies and drugs. The music will keep coming. Same thing is true with books. So you can decide to hassle your readers (oh, I mean your customers) and you can decide that a book on a Kindle SHOULD cost $15 because it replaces a $15 book, and if you do, we (the readers) will just walk away. Or, you could say, "if books on the Kindle were $1, perhaps we could create a vast audience of people who buy books like candy, all the time, and read more and don't pirate stuff cause it's convenient and cheap..." I'm a pessimist that the book industry will learn from music. How are you betting?
I'm betting the newspaper business will have to do more dying before it's reborn. I'm reminded of the Dylan lyric, "He not busy being born is busy dying," which sounds nice in theory but is not at all nice or easy in practice.