Agreed 100%. Without an organizing force behind specific implementations of this sort of technology, it's just technology.
Reddit has a Chicago Subreddit. Meanwhile I run a social news site for Chicago. One (my site) is more interesting than the other because we're actually putting people, thought and energy behind it.
I'm more interested in creating better incentives for people to use existing tools to cover their communities.
I think you do this by:
1. Getting them better data - City governments are far from transparent. Newspapers get info out of them at great expense and then sit on it, because it cost them so much. Everyblock, Sunlight and organizations like that are hammering away at this. If you give local bloggers access to better data, they can bring you better coverage and have more fun.
2. Getting them tools to build an audience - Let's say you want to start a blog about businesses in your neighborhood. How do you get that initial bump of traffic to the site? When you have a really good story, how do you share it with your city? If you go to the newspapers, odds are they'll write their own version of your story and not even link to your site. I'm working on WindyCitizen.com to attack this one, a social news site for and by Chicagoans.
3. Get them ways to make $$$ - A lot of folks aren't in it for the money. But if you can make even a few hundred bucks a month off your local blog, that's enough to make it interesting for folks. There are about 10 local advertising startups floating around out there. No one's come up with a really good solution yet. I'm thinking this might be another organization, rather than technology problem.