The replacement for newspapers isn’t Craigslist; it’s local social media.

Much has been made of Craigslist rising up to destroy newspapers' classified-listings business, but less has been said about newspapers' own sins in falling behind the needs of their commercial advertisers. For decades, publishers had the luxury of actively disparaging, say, the bra ads that made 10-part Pulitzer Prize reportage possible. But the rise of the Internet, despite taking decades, caught them unprepared. New York University professor and longtime Internet sociologist Clay Shirky recently explained, "When Wal-Mart and the local Maytag dealer ... were all able to use [the Internet] to get out of their old relationship with the publisher, they did. They'd never really signed up to fund the Baghdad bureau anyway."

Yet while the online presentation of news has made tremendous leaps, ingenuity has not carried over to the business side. Online readers see (and ignore) the same lame online display ads they did 10 years ago, just more of them, and bigger. And the most expensive online advertising now actively blocks readers from viewing any content until the ad has fully played. This is progress?

The truth is, there has been progress in monetizing the Internet, beyond the display ads most people ignore. But that progress isn't coming from newspaper companies. It's coming from companies like Yelp. And Yelp is currently eating newspapers' lunch.

Yelp, for the uninitiated, is an online review Web site of local businesses in metropolitan areas around the country. Founded in San Francisco in 2004, it has been aggressively expanding into most major American cities and their suburbs, even setting up a site in London. On the surface, Yelp seems no different than the legion of older local review sites already out there. Tell it where you are and what kind of business—restaurant, bar, spa, nightclub, moving company—you need. The site in turn supplies you with a ranked listing. Once you click on a listing, a batch of short, quirky reviews, complete with star ratings pops up. Cold fusion, it's not.

But Yelp's founders have invented a Web site that cleaves local online advertising from journalism, right when journalism needs it most. Yelp is the evolution and replacement for the actually quite useful local advertising that used to appear in newspapers, only without the pesky journalism breaking up the ad pages. And Yelp is trying to make that separation permanent.

The site's design hammers home that its reviewers are real people, just like you, not shills or trolls. When you read a review that clicks for you, you can follow the reviewer's profile and what other businesses they've written about. You can also see which reviewers they follow, in the manner of Digg or other social-media sites. In short, you can very quickly start to build a trusted network of strangers whose opinions, on things like bagels and beer prices, you value. It's a pretty nifty way of finding a hidden gem of a restaurant or decoding a new neighborhood. And it requires only the faintest sensation of interacting with another human being. Yelp represents an evolution in advertising that newspapers should've been providing to readers and advertisers years ago.

Editorial staffers have long resented encroachments by the business side into their cocoon of journalism. And perhaps with good reason—the advertorial, sponsored story, and section insert packages that business staffers bring them are usually ham-handed and degrading affairs for all parties involved. Plus, who reads advertorials? Even if they're cleverly disguised, who keeps reading an advertorial after they realize they've been had?

Contrast the one-way display ad or advertorial with the type of back and forth that Yelp facilitates between its users and their local businesses. On Yelp, you might read a few lines of advertising from the business owner—indeed, that's how Yelp hopes to make its money. But the vast majority of the content you're reading comes from other users. People like you. By carefully monitoring and policing the reviews, Yelp also keeps its reviews from disintegrating into irrelevance and absurdity.

Yelp's growth has lately earned it the kind of ire, discussion, and attention once lavished on daily newspapers. The site has been caught up in a scandal about hard-selling local businesses on its advertising packages. Business owners have accused Yelp's salesmen of leaning on them to become advertisers, making them an offer they can't refuse: improving their Yelp rankings by burying negative reviews or, better yet, making them disappear altogether. CEO Jeremy Stoppelman has vigorously denied such charges. Yelp, like Barack Obama, even has a "myths" page set up to dispel the nasty rumors.

Whether Yelp conspires to alter ratings is something only a handful of engineers can know for sure. Small-business owners, some of whom feverishly guard their online reputations, are surely hyperconscious of the daily ebb and flow of their Yelp rankings. But for all business owners, Yelp is providing what the Times and its ilk didn't recognize as valuable when local business advertising was still in their pockets: Yelp is facilitating that faintest sense of human interaction between businesses and their customers.

I understood the power of this interaction when I started reading Yelp reviews for moving companies as I prepared to move from Manhattan to the Fort Greene neighborhood of Brooklyn. Within the sometimes-dizzying array of data on the page were reviews that hinted at two-way interaction between customers and businesses. Some reviewers gave one moving company I was considering crappy Yelp reviews, but the company contacted the customers to make things right. This was a revelation, "like a CRM tool," for local business, Yelp spokeswoman Stephanie Ichinose told me. Reviewers, "hear back from business owners, thanking them for a critical review. That's a channel that didn't exist before. That customer would be upset, go away, and didn't get that feedback."

Businesses, in other words, are using Yelp comments to better serve their customers. One pizzeria in San Francisco printed up T-shirts with its harshest reviews for waiters to wear. They were complaining, tongue in cheek, about the unfairness of some reviews, but have they ever been more connected to their customers? Not just to their nice regulars, but to the quietly seething guy in the corner, who will use one lukewarm pizza as rationale to vilify the place to any friend he has who will listen? For the first time ever, Disgruntled Pizza Eater Guy has an outlet to vent in true modern, passive-aggressive style—online. But much more importantly, the pizza shop has a mechanism to make things right by him and respond to him for others to see how they handle things. And if they can please him, he can update his review.

I wasn't too interested in reading the fawning comments about my eventual movers; the review that fascinated me had to do with an interaction gone bad. The owner of the company apologized to the reviewer, in an effort to get a better star rating. "Yelp rewards us for giving great service and offers powerful incentives to do better," Paul, the owner, told me in an e-mail. (I contacted him after my move, which went great.) And those incentives have changed Paul's telephone manner, arguably for the better. Paul says that when a "jerky/neurotic/trying-to-get-over client starts yelling on the phone, I can't yell back anymore!" 

Which is to say Paul never considered that potential customers, no matter how eccentric, probably don't want to be yelled at by him until his Yelp reviews made it clear. As a consumer, it doesn't bother me that my satisfaction is tied to businesses' desire to avoid negative ratings on Yelp. If anything, I'm glad the exchange between business and customer is finally being shown for what it is: a transaction between strangers rooted in the hope that nothing gets screwed up in the process. And Yelp recently decided to allow businesses to publicly respond to reviews on their listings page. Now you'll know not just that your dry cleaner of choice has five stars, but how they'll behave if they accidentally ruin your suit.

The neighborhood I moved to recently became part of a Times pilot project called The Local, which is a blog catering to my neighborhood staffed by one reporter and a team of unpaid journalism students. Tim Armstrong, a Google (GOOG) executive recently named the new CEO of AOL, is behind a competitor called Patch. And the Times itself noted a few hyperlocal media startups in other cities. So far, the result of this hyperlocal competition is that a few upscale commuter towns in North Jersey are benefitting, or maybe suffering, from saturation media coverage. And despite rumblings otherwise, the Times approach remains largely rooted in having professionals report the news, opening the floor only to comments.  Even though the Times has claimed The Local is nothing more than an experiment at this point, one has to wonder how it can be long supported when a better-organized, more effective local resource called Yelp is already stealing away its logical market: local advertising dollars.

The thing is, while both The Local and Patch have some interesting features, they are mostly replicating what people are organically creating in their own communities. The whole point of the Internet is that you no longer have to wait for Patch or the Times to set up a bureau in your town—all you need is a blog account and a few dedicated locals who know how to pick up a phone and take notes. Local journalism is important, too important, in a way, to wait for the Times to tell us it is. Media companies and thinkers alike are still tilting at developing a model for it as fast as they can. But Yelp has probably already stolen away any chance they had at turning a buck in the local racket. Newspapers have precious few dollars left. They're better off spending them at efforts that don't belatedly duplicate both commercial and communal efforts to put them out of business.