This is very interesting and perhaps a sign that Community Journalism is leaving the margins and taking its place along side traditional journalism in the main stream.
I did an article last year on Community Journalism for EContent Magazine (which won an Apex Excellence Award) and I was so taken by the idea after interviewing the principals who run a community site, iBrattleboro.com in Brattleboro, VT that I was ready to start a similar venture in my home town. Unfortunately, it didn't get anywhere because life and paying jobs (on to the next article) got in the way, but I still think it's a terrific compliment to traditional journalism and one I would love to explore further if I only had the time. (It's on the list with completely redesigning my web site.)
Knight News is putting up a lot of money, and it should be interesting to see what comes of it.