I think possibly local TV’s best chance of gaining a foothold in the UK would have been if a raft of local licences has been issued in the 90s instead of creating the national licence for Channel 5.
With only four other terrestrial channels at the time, and next to no online advertising to compete with, they would have stood a much better chance of getting established.
Even so, by now they’d inevitably be facing cutbacks and mergers in the face of mounting competition in the same way as local commercial radio and local newspapers have.
Sadly the most successful and prosperous days of local media are long behind us - something Jeremy Hunt failed to grasp when launching his plans for Local TV.
I'd caution that, in the world of radio discussions, the opposite argument is often made - that instead of awarding regional licences the powers that be should have licensed national stations to take on the BBC instead, rather than left things drift towards that through takeovers and brands. So I suspect your following point would have proven to be true, and people would probably be asking "why didn't they just do a national Channel 5?"
I remember in the L!ve TV book the Mirror seriously considering bidding as part of a consortium, but they just couldn't make the numbers work. Even back then, considering the amount of aerial retuning required, it was a big ask to take a huge number of already established terrestrial broadcasters.
The problem is that the government and public don't recognise that the UK is a relatively small country. One that punches above its weight in many respects, true, but when it comes to having the scale to do certain things we're not in the same league as the US. US local stations are aligned with national networks, have heritage behind them, have huge populations to target and have very distinct differences from each other, as separate states with separate politics/laws.
In comparison, we asked local stations to start from scratch without a solid national spine in a country with a relatively tiny population - you're licensing Ayr, for God's sake - to take on everything else out there. No wonder the people who got involved were overwhelmed early doors, anyone with any sense (and without a vested interest, like STV) would have run away screaming.