Even the seemingly endless resources of AOL couldn’t make the company’s local news venture work, as Patch prepares to purge some 500 employees and shutter as many as 400 of the local websites. According to reports, 300 employees were already released last week, with a remaining 200 in limbo.

“Patch, as previously announced, is taking steps to move to profitability. Patch’s strategy will be to focus resources against core sites and partner in towns that need additional resources. Additionally, there are sites that we will be consolidating or closing,” read a statement released by AOL. “We have to get Patch into a place where it’s going to be successful and it’s going to be successful for a long time. There’s a whole bunch of towns that are going to be successful but we need the whole enterprise to be successful.”

The announcement made last week was not without added drama. Armstrong, on an all-hands call with over 1,000 Patch staffers, publicly fired Patch Creative Director Abel Lenz for supposedly recording private Patch meetings and leaking information to the media. Armstrong later apologized for his “emotional response.”[more]

For now, AOL plans to keep about 540 of the sites operational—the ones that generate about 90 percent of Patch’s traffic. AOL claimed Patch’s online traffic grew 10 percent in the April-to-June period last year while AOL’s advertising revenue rose 7 percent to $361 million in Q2.

Despite a failed $4.5 million investment in 2007 from Armstrong himself, who was co-founder, critics say hyperlocal isn’t dead—it just proved to be too small a strategy for as big a player as AOL, which hoped to make the local sites attractive to both national and local advertisers. Still, plenty of smaller, locally-owned community news sites are succeeding in the $132 billion US market. “This business is certainly not for the faint of heart,” Denise Civiletti, editor and publisher of RiverheadLOCAL.com, a small news site in Long Island, NY., told AdAge. The site posted “solid six figure” revenues in 2012, enought to support Civiletti and her sole salesperson, her husband, but she knows very well that “local doesn’t scale.”

Liena Zagare sold her profitable network of five local news sites to Patch in March 2011 and subsequently launched four more localized sites and is doing quite well at a scale that allows the flexibility smaller marketers want. “If an advertiser wants to use their Instagram feed as an ad, I can do that,” she told AdAge. “It’s a lot harder to do that when you’re in a big corporation because you’ve got to get approvals from somebody somewhere to do something.”

The future of hyperlocal is bright, but fragmented, commented BIA/Kelsey analyst Peter Krasilovsky. “I don’t know that we’re going to see a destination site that really dominates the market.”