Your situation is interesting and complicated.
Companies that publish traditional paper media such as newspapers and magazines are, in many cases, in the business of trying to get content in very cheap ways, and have tried over many years to to hone their cheapassness techniques. They might be willing to use a lot of sleazy techniques like:
- taking advantage of many people's excessive enthusiasm about how wonderful it is to be "in the newspaper" famous, talk to cool people it will be their job to report on, etc. This might be a worthwhile trade for some people, but be careful about an offer to "work for us for free or nearly free now, so you can
get better opportunities later." The "better opportunities" might or might not be available. Some of the people who accept the scammier versions of this kind of deal have fifth-rate minds as you can tell by reading (crappy) stuff they produce.
- preference-revealing bait-and-switch (an employee of the media co. starts negotiating a preliminary deal with you, then it turns out they don't have deal-making authority, but the deal-making rehearsal got them useful information that can be used to take advantage of you in later negotiations.) Outside of media corporations, this trick is notoriously used by used-car dealers a lot.
- contracts (maybe "standard contracts") they want you to sign, that turn out to have important details that take rights and opportunities away from you (or make you liable for stuff)
- just plain steal content or ip, and dare you to sue unless you settle out of court for a small amount (This happened to the guy who wrote "Things My Girlfriend and I Have Argued About" at http://www.mil-millington.com/ )
- Sending a cool with-it chick to negotiate with you, hiding their real nature. :-) (Have you ever read Courtney Love's "Courtney Love Does the Math" expose on how record companies weasel out of their nominal payments to ecording artists? It's worth reading.)
BTW: Traditional media companies' "core competency" in getting content for a relative pittance through exploitation is one reason that the rank-and-file workers in many media are so in favor of national health insurance. Many media workers are poor enough, and so poorly- or non-insured, that they really really need the insurance. :-/
I also suggest that you consider--is your target audience more likely to read this newspaper's website, or your own site? Can you do anything (preferably practically cost-free) to influence that? It's possible that you're already the market leader. Can you take steps to hold on to that position? Link exchange is one obvious possibility, but you can probably think of others.
When it comes to trying to find 'comparable prices or rates' for content, remember that "Dear Abby" or "Click and Clack" can provide the same content to thousands of publications nationwide, so they can sell it very cheaply. You, on the other hand, would be providing content that must be specific to your geographical location. So don't be taken in by invalid comps.
It's also worth remembering that the newspaper website can at least try to find someone who will work cheap or free for the 'fame' of having their name in the paper and other peculiar perks of their job (like a newspaper music reviewer here in Tucson who got drugs from bands he reviewed.) This is what newspapers try to be good at! So you have to be ready for the possibility that they will try to hand-roll their own competitor to you regardless of whether they can realistically do it well in the long term (or if they will end up publishing
stuff that eventually looks like the guy who did it is on drugs.)
A newspaper's blatant attempt to copy and compete with a specialty provider of news in their geographical area doesn't necessarily kill the specialty provider, though. Here in Tucson the print publication _Tucson Weekly_ was a provider of arts/culture news for many years before the largest local conventional newspaper, the _Arizona Daily Star_, created a copycattish arts/culture weekly to compete with it. Over a few years the copycat shrunk and wilted, but the _Tucson Weekly_ appears to be going strong.
Might I also suggest that if you want to deal with newspapers, you might want to talk to all the newspapers or other news publishing companies (even non-paper ones) active in your geographical area? This might give you a chance to be the one established provider negotiating with multiple other parties who are competing with each other.
If you decide to license (some?) content to the newspaper site, you might be able to find ways to differentiate your website from theirs in ways that are to your benefit. You know your topic better than I do, so I leave that creative task up to you. :-)
Another possible idea is to gain an economy of scale by covering more metro areas than you do now. Maybe then you could cut the cost per metro area and maybe be able to figure out a way to make money?
I wonder if you can do (a) worthwhile affiliate deal(s) with iTunes, Amazon.com, or some other business(es)?
Good luck, and have fun! :-)