Someone who will borrow a library book but won't buy a new one is not a pirate; they're not a threat to my income: because they're not a potential sale in the first place.

Why not? As far as I can remember my transition from library reader to book buying customer, it was triggered by a combination of (a) more disposable income and (b) worse relative access to libraries (the libraries were a bit worse stocked, and my tastes had become a bit more specific). If I had always had any book I was interested in available in a library, I might very well only own a fraction of the books I own.

If you want my idea of a real threat, it would be a rogue printer churning out counterfeit DVD's/CD's/books and selling them without paying royalties.

I can see why this would be so for books - because the physical copy is still vastly superior to the electronic copy. But why do you think so for CDs? Ethically, I would think that people find it easier on their conscience to download an illegal electronic copy than to buy a counterfeit physical copy. Furthermore, counterfeiting seems to be strongest in countries where personal income is kind of low to generate a decent revenue stream for the legal copy anyway.

Free downloads are free advertising,

Absolutely. That has always been an offsetting benefit of legal and illegal free copies to content creators.

and 80% of the sales of a book take place in the first three months after publication.

But isn't that partially the consequence of publishers not keeping books long in print, especially in SF? Even a well reviewed novel by a well known author such as Banks' The Use of Weapons has apparently not been in print in the U.S. for years. However, electronic stores (for music) semi-electronic stores (e.g. Netflix for DVDs, Amazon) and print on demand (for books) are starting to make it economical to keep much larger backlists commercially available. This should raise the tail end of the sales distribution somewhat, and might push out the point at which giving the book away is the commercially most sensible solution.

In the end, what I really want is to maximize my audience, while still earning a comfortable living.

Yes, I think that's what most content authors really want. The problem with the music industry is really that the middlemen call all the shots regarding distribution, and nowadays they have no real artistic ambitions themselves, so they work purely for maximum profit.