Arrh! The Economics of Piracy

Ahoy! I couldn't resist retelling this tale about the high seas.

Remember back in April when the Captain Richard Phillips on the Maersk Alabama was taken captive by Somali Pirates and the US Navy choreographed a daunting rescue, unseen before on public television? The whole story captivated us for it's brief period of popularity and then faded off into the sunset. Surfacing some time afterward were interesting side stories about the phenomenon of Piracy and its untold truths. One in particular that grabbed my interest centered around the economics of Piracy and how it can be a profitable business for those looking for high stakes rewards on the high seas.

Pirates Have Timesheets
NPR's Planet Money has run a few stories about Pirating and how, in comparison to other investments, can show profitable returns. The first podcast aired on 4/22/09 entitled "Pirates Have Timesheets" (Listen or Read). The most captivating element of the broadcast was the fine balancing act between the Somali Pirate's business acumen versus their primitive boorishness that is modern Piracy. The story has all the elements of a business case study, ripe with classic examples of investment, risk and rewards. There is the occasional surprise however when you run into the crudeness of Pirate strategies which awaken you into the reality of who you are really trying to do business with. It's quite entertaining.

So You Want To Be A Pirate
Ready to run your own crew? If you are, here are a few important Pirate tips you'll hear about, which you should take with you to Davey Jones' Locker:

1. Finding Capital Financing for your to train your new Pirate recruits
2. Creating a Business Plan to determine which ship to attack (Americans and Europeans are "worth" the most)
3. Rounding up your professional Pirate negotiator (Customer Servicing to "be polite" and how to include employee incentives)
4. How to ensure your Pirate business phone card always has calling card minutes
5. Filling out and retaining your Pirate timecard for submission
6. Faxing and transferring the money (actually ... how to drop millions into the ocean and have your Pirate crew fight hand-t0-hand for 30 hours over their booty).
7. Profit sharing based on your Pirate Job Description (from financier to basic security).
8. When you've been paid off, how to get a ride home from the ship you just hijacked
   

There's so many business/pirate elements in juxtaposition that it's hard to fathom.

The Follow-Up Report
After the original report, there was a buzz about the economics of Piracy. It was such a new and curiosity piquing topic that a follow up was done with the same shipping company. In fact, the most puzzling and unbelievable thing was new relationship that was built between Gullestrup and Mr Ali (Listen or Read). Where one was once the victim and the other the negotiator, both now have a strong relationship between them that they continue to cultivate. It really is just a business to them.

A Few Other Thoughts
The real differences in this economic model lie in the details. The Pirate's have the funding, business plan, investment and operations just as any other business has. One major difference with this model is the excessive risk premium which is expected by their stakeholders. Anyone knows that financing a Pirate enterprise is on the risky end of any market. This type of risk is something that is typified by risky equity investments or low grade (rated) bonds where unnatural returns on investment are demanded. As you'll here in the audio, you just can't get these returns on Wall Street that these Pirate financier's are getting in such a short period of time.

Further, the Somali Pirates believe that they are protecting their waters (a la the US Coast Guard). Hard to believe because no one is attacking them or their country, yet this is partially their motivation. There is some weight in the argument that pollution and dumping in their economic zones, (exclusive or special) is occurring. But these Pirate attacks are extending out into international (uncharted) waters so the entire argument doesn't fully stand up.

Hope you enjoy the trip!

For some last minute fun ... head over to PirateGlossary.com to get some updated Pirate terms to share with y'er folk. Also, some Pirates of Caribbean bloopers is in order as well. It's so cool to blog about Pirates :)