Sadly it’s more complicated than that.
Back in the 1990s, Microsoft distributed a Netware-killer version of NT called Windows Small Business Server. It was aimed at companies that might at best have a dial-up internet service. SBS, being based on Active Directory and Exchange (etc usw) required a domain name, but back then you needed considerable arcane knowledge to register an Internet domain name, which most SBS users lacked.
So Microsoft recommended that their SBS users should pick a name under .local for their AD domain name. I will not relive the many hilarious fuckups this caused, especially when Exchange was trying to use POP3 for incoming email. [tedu’s comment upthread reminds me of an incident when I spotted a company that was clever enough not to use .local for their AD, but not clever enough to understand that corp.int is not an internal subdomain of corporation.com.]
(What MS should have done, instead of squatting on a name that might get created as a real TLD in the future, was tell their customers to make up a subdomain of a properly registered domain of MS’s own; if MS’s customers wanted to turn their fake domain name into a real internet presence, MS would have had a ready-made lever to turn their customers into subscribers. But that was 15ish years before MS realised Azure might be a good idea.)
OK, so part two of this story is the early years of Mac OS X when Apple needed a replacement for AppleTalk that worked with IP over Ethernet. The main gap that needed filling was zero-configuration service discovery, which AppleTalk had enjoyed forever and IP lacked. The solution was called Rendezvous or Bonjour (I forget which name replaced which) and multicast DNS was a foundational part of it. Apple did an incredibly effective job of getting other vendors (especially printer manufacturers) to adopt the new protocol.
HOWEVER, Apple needed to choose a domain name for mDNS so that names of devices on the LAN could be distinguished from names out on the internet. They chose .local because a LAN is a local area network.
Hence, hilarity ensued. So much confusion and failure to interoperate because two large corporations failed to appreciate the importance of a global shared namespace, and foolishly chose the same cute name to mean completely different things.
Possibly the saddest episode was when Apple were in the process of turning mDNS from a de facto standard (with multiple implementations across multiple vendors) into an IETF standard. MS tried to derail the effort by persuading the IETF to spin up a working group to develop LLMNR, link-local multicast name resolution, TOTALLY NOT mDNS HONESTLY. Surprising no one, there was zero interest in replacing a successful working deployed protocol with slightly differently shaped vapourware. Rough consensus and running code wins again.
The upshot of this is that the IETF has a lot of institutional trauma and scar tissue around the question of non-DNS domain names. (see also .onion and others)