Counterpoints to your counterpoint: The New York Times is a) doing ok for now but not great [1] b) most importantly, the NYT is an American institution that is in a league of their own. Few newspapers have the prestige, quality and history of the NYT.
Not to mention that despite their paywall, anyone can still link to an article in the NYT, and people can read it for free (as long as they haven't read too many articles that month). The NYT seems to have realized that the links to them from all over the web are free advertising that they can't afford to do without, and that having lots of people discuss their articles on the web makes them more influential.
Prestige and quality may help the NYT be successful in charging for content but that doesn't mean smaller local newspapers will fail if they try the same tactics. Warren Buffet seems to think that the paper editions of local newspapers will not fail (especially in areas with strong community) and owns over 20 now. It seems likely that eventually they will just charge for online access and be successful at it.
Does Google have to pay the NYT for each link to a NYT page in their search results? I doubt it. That is what the Irish papers are proposing. The NYT has decided that Google traffic is so important, they will let users access their content for free if they come from a Google results page. That to me reinforces the idea that charging people to link to you is self defeating.
Yup. The NYT paywall is quite "leaky" in general, and it seems that the paper is not particularly bothered by this; you can easily play simple URL or cookie games to avoid the paywall, and this hasn't changed in ages. Their web team is very good, and it's pretty certain they're aware of all this.
In other words, it appears that the paywall is intended not so much to prevent people from reading the paper free, as it is to remind people "hey this is a great world-class paper, if you read it a lot, how about a subscription?" I routinely go around the paywall, but I always end up seeing the "hey subscribe" reminder first...
It's a subtle and risky game to be sure, but they appear to be playing it better than most.
I think that's his point. If a large newspaper such as the New York Times isn't able to sustainably charge for content, even with readers that largely depend on it for their livelihoods, then how is a smaller newspaper going to get away with similar practices without losing much of their consumer base.
[1] Stock price for NYT has gone down 80% in the last 10 years: http://www.google.com/finance?q=NYSE%3ANYT&ei=g9XhUJiAJ6...