Lockheed Martin | Acquired

Those two movies are so freaking good.

It's so shocking how good Maverick is.

So many years later, in such a different environment, and then like delayed due to coronavirus.

Well, the funniest thing is when it was delayed for whatever years during coronavirus, the

fighter that Maverick is in is an F.A. 18 Hornet, the Boeing plane.

And by the time the movie gets released, it's basically discontinued.

Within a couple of years, that's when they end of life the F.A. 18 Hornet for the Navy.

Did you catch the Lockheed thing in Maverick?

The skunk on the tail of the plane.

Oh, yeah. On the Mach 10 Dark Star aircraft.

Dark Star.

Oh, God.

All right. Let's do it.

All right. Let's do this.

Welcome to Season 12, Episode 5 of Acquired, the podcast about great technology companies

and the stories and playbooks behind them.

I'm Ben Gilbert.

David Rosenthal.

And we are your hosts.

Today's episode is on a critical piece of American infrastructure, Lockheed Martin.

They are the nation's largest defense contractor.

They're actually the federal government's largest contractor period.

The American taxpayers pay Lockheed Martin around 50 billion dollars a year.

And just to state this early and clearly, Lockheed Martin makes, among other things, killing machines.

The company is, of course, critical to defending the American way of life.

And most of these things they make, fortunately, are used as deterrence to keep peace.

But we should not mince words.

They make weapons synonymous with phrases like overwhelming force and air superiority.

You may feel and probably should feel conflicted as you learn about this company.

There are really no easy answers to the question, is what they make right or good?

And that's why we entrust the decision to use their products to the office of the president of the United States.

But this company's history is absolutely fascinating.

There's stories of hardcore engineering, daring innovators, and it's frankly just inspiring.

Yeah. Going back and learning all this and soaking in the history of the times when Lockheed was really forged

gave me at least a whole new perspective on this killing machines and deterrence question.

To tell the full story of Lockheed and Lockheed Martin and all the predecessor companies that came before it,

because I think it's like 17 companies all merged together at this point, would probably require a full season of acquired.

So we're not going to do that.

Instead, we're going to focus on two interwoven stories from Lockheed, not Martin, but Lockheed's golden eras.

And the first of those stories is the famous Skunk Works.

The second one, I'm not going to say what it is, so we don't spoil it just yet.

But as a teaser, it's unbelievable and is directly tied in to the birth of Silicon Valley.

So if you're in the tech world and you think Lockheed Martin and Defense and fighter planes doesn't apply to me, think again, because pretty much everything you do came out of this.

So I can't wait to tell it.

Quite the teaser, David.

Well, listeners, this episode was selected by Acquired LPs.

So if you want to help pick an episode for next season, you can become an Acquired Limited partner, come closer to the show in other ways, including a private Zoom call with us every month or two for all the LPs.

You can join anytime at Acquired.fm slash LP.

If you want more from David and I, you should check out our interview show, ACQ2.

Our last episode was on the topic of how generative AI can be valuable specifically to B2B SaaS companies and probably more importantly, where it cannot.

And listeners, you can just search ACQ2 anywhere podcasts are found.

We've got some awesome interviews coming up, too.

ACQ2 is on fire.

Yep. Join the Slack Acquired.fm slash Slack.

We'll be discussing this episode there afterwards.

And without further ado, David, take us in and listeners, as always, the show is not investment advice.

David and I may have investments in the companies we discuss and this show is for informational and entertainment purposes only.

So for many of you listening, one thing you may not know that I didn't really know till we started the research is that the company that eventually became Lockheed Martin today was two companies.

It was Lockheed and Martin Marietta.

And there was a huge merger in 1995.

Lockheed was actually the second Lockheed company or really maybe the third.

The first Lockheed company was founded in 1912 by one Alan Lockheed.

But if you were to look at the spelling of his name, it would look like Loghead.

L-O-U-G-H-E-A-D.

Yes.

But it was pronounced Lockheed because it is Scottish like lock like Loch Ness, Lockheed, not Loghead.

He eventually changed his name to Lockheed and the name of the second company to Lockheed to avoid mispronunciations, which is great.

He didn't just rename Lockheed the company.

He's like, yeah, I'm actually going to change my own name spelling to match it.

Yes. So great.

So he started the first company with his brother, Malcolm, and they were more or less contemporaries of the Wright Brothers.

It was based in San Francisco, of all places, and it was mostly kind of a tourist attraction.

They had one plane, the Model G, and they flew tourists around over the bay and evangelized this new flying technology.

It had a bunch of ups and downs.

Malcolm leaves the company and goes to Detroit to seek his fortune in the automobile industry, where he invented the modern hydraulic brake system for automobiles.

So every time you press the brake in your cars, you're using Malcolm Lockheed's technology.

No way.

Yeah, super cool.

They also end up hiring into this first Lockheed company, one John Northrup.

Yes.

That might ring some bells to help them design their future airplanes.

John would go on to be a co-founder with Alan of the second Lockheed company, then leave to strike out on his own, where he founded the Avion Corporation.

It gets acquired by Douglas and becomes a big part of Douglas.

Douglas, of course, is now part of Boeing.

And then after that, John, as you might imagine, founded, you guessed it, Northrup, which is now Northrup Grumman.

So this one dude was responsible for founding or playing a major role in three of the remaining five defense prime contractors today.

But anyway, the first Lockheed company goes under.

They start the second one a few years later.

They have some success with the Vega airplane.

People might be familiar with that.

It becomes a favorite of Amelia Earhart and Wiley Post, famous early aviators.

It becomes successful.

This second Lockheed company, they end up selling it to a consortium of Detroit auto moguls, maybe through the relationships from Malcolm or something, that have formed the, quote unquote, Detroit Aircraft Corporation or the DAC.

This is including Charles Kettering, the founder of Delco and head of research at GM as part of this.

You may know Memorial Sloan Kettering.

Exactly.

Same dude.

So the idea was they were going to build the General Motors of the air.

There was just one problem with that is that aviation did not become a consumer industry like the automobile industry.

Alan Lockheed departs at this point in time and is kind of tangentially involved.

But this company that to this day bears his name after this point in time, he doesn't really have a lot of impact on.

Now, shortly after this maybe harebrained GM of the air idea comes together and Lockheed gets sold to the Detroit Aircraft Corporation, the stock market crash of 1929 and the Great Depression happens and DAC predictably goes bankrupt.

They sell off the Lockheed division, which is actually still fairly profitable out of bankruptcy to an entrepreneurial young businessman named Robert Gross.

And this is really the founding of the modern Lockheed.

And the craziest thing, this price that he bought it for $40,000 was so low that Alan Lockheed actually considered bidding to buy his company back when they had it on the auction block.

And his considered bid was $50,000, but he thought that is so low that it might be insulting.

There's no way they'd ever sell it.

So he didn't actually bid and the winning bid was $10,000 less.

So amazing when everything you know of Lockheed today got bought out of bankruptcy for $40,000.

It's crazy.

So under Robert Gross and his brother Courtland, who gets involved, they really are the ones who turn Lockheed into the great company it became.

So before World War Two during the 30s, Lockheed builds the famous Electra airplane, which is absolutely iconic.

This is the plane that Amelia Earhart disappears in, perhaps even more timelessly.

This is the plane at the very, very famous scene at the end of the movie Casablanca, when Rick puts Ilsa on the plane with Victor to escape the Nazis and says, here's looking at you, kid.

That plane is an Electra, I believe, an Electra Junior.

And listeners, you know, this plane, it's one of those romantic early aircrafts that were always sort of perched up at an angle where if you saw it standing still on a runway,

it looked like it could just take off at any moment.

Absolutely beautiful.

The Electra and Casablanca brings us to the first core part of our story, which is World War Two, which transforms everything.

And a man named Clarence Kelly Johnson, who started the famous Lockheed Skunk Works division.

And this is great because before I started the research, I was loosely aware that Lockheed had the first Skunk Works.

Now it's become almost like Kleenex when someone says Skunk Works, oh, we're going to start a little Skunk Works division.

And like it was not a thing until Kelly Johnson started the Skunk Works.

So there's a wonderful book.

There are a bunch of wonderful books around Lockheed, but a book titled Skunk Works that was written by Ben Rich, who was Kelly's second in command for a long time at Skunk Works and then took it over when Kelly retired.

And this book is like the top gun of historical autobiographies.

You read it and you were just fired up.

It is amazing what these people did.

It's Top Gun for Engineers.

Yes, it's so great.

I also highly recommend a book called Beyond the Horizons, which is hard to find and most people don't know about by Walter Boyne.

And that is an amazing history of Lockheed during all these eras that we're going to talk about.

David, that's so mean you're recommending an out of print book to people.

We keep doing this.

This one, I think I only paid like 40 bucks for on Amazon, so it's not quite like Taste of Luxury and LVMH, which I think that's now like three, four or five thousand dollars.

Oh, yeah.

No, we definitely spiked the price.

We did.

All right.

So who is this Kelly Johnson?

He's basically the Shigeru Miyamoto of airplane design.

His nickname is Kelly because when he was in grade school growing up in Michigan, his real name was Clarence.

An older boy called him Clara on the schoolyard and Johnson attacked him so viciously that he broke this kid's leg.

And so after that, all of his schoolmates never called him Clarence or Clara again and they nicknamed him Kelly.

OK, so not Clara, but why Kelly?

There was some character of Kelly, kind of an Irish tough guy that they named him after.

That really was his personality.

So after every skunk works test flight for the rest of his tenure running skunk works, they throw a big party and Kelly would challenge anyone, all comers to an arm wrestling match.

And even when he was like 60 years old, he was still beating people.

You should Google a picture of this dude.

He is just a 1930s man's man at his finest.

And maybe the best airplane designer ever to live.

That is Kelly Johnson.

And when you hear the stories about him, he could intuit the answer to difficult math problems in his head and not just math problems, but like physics problems and applying Bernoulli's principle in his head and come up with an answer that was five percent off from the actual answer.

And someone else would go spend hours and hours and hours with pencil and paper and slide roll to come to basically the same number.

The quote from his first boss, Lockheed's chief engineer at the time, Kelly would become the chief engineer.

But his boss at the time, Hall Hibbard, would say, that guy can see the air.

So Kelly ends up winning the Collier Trophy twice, one of only two people to do so in history.

The Collier Trophy is the equivalent of like the Oscar for best picture.

It's the best airplane design of the year.

He wins it twice.

He ends up being bestowed the Presidential Medal of Freedom by Lyndon Johnson, leader in his career.

He is a true American hero.

So he ends up joining Lockheed right out of the University of Michigan Engineering School.

I'm sorry, University of Michigan, you know, Ohio State, sorry, then in 1933 at 23 years old.

And Kelly is really one of the if not the principal engineer that designs and builds the Electra.

So he becomes the star of Lockheed's then only six person aviation design and engineering department.

There were six people that were making these things crazy.

And he does basically everything himself, engineering, designing, testing, even flight testing.

There's this amazing quote in Skunk Works.

This is Ben Rich talking.

Kelly once said that unless he had the hell scared out of him at least once a year in a cockpit,

he wouldn't have the proper perspective to design airplanes.

So great.

OK, so the start of World War Two rolls around.

And the first thing that Kelly and Lockheed do is they adapt the Electra into a bombing vehicle called the Hudson.

And even before the U.S. enters the war, the British Royal Air Force ends up buying about three thousand of these Hudson's from Lockheed.

Yeah, this is a thing that was eye opening to me doing the research.

Lockheed's big customer in World War Two before the U.S. enters was Britain's Royal Air Force.

They were a way bigger customer than the U.S. was for many, many years.

So then once the U.S. enters the war and as they're gearing up to enter the war,

Kelly designs the amazing P-38 Lightning fighter, which was the U.S.'s elite, fastest, most maneuverable aircraft during World War Two.

They made over 10,000 of them during the war and all of the top aces in the U.S. Army Air Corps flew them.

It was the plane that shot down the transport that was carrying Japanese Admiral Yamamoto, the guy who had kind of masterminded and overseen the Pearl Harbor attack.

This is a legendary airplane.

Side note, I will say last week, partly in preparation for recording this, but partly because it's something that I've always wanted to do.

I went to Pearl Harbor and there is truly nothing like being there and experiencing that.

Growing up in America, we basically haven't had attacks on our soil.

It's 9-11 and Pearl Harbor period.

So it's a very unusual thing to see in your own country the remnants of an attack.

And being over the sunken U.S.S. Arizona from the Japanese bombing, it's harrowing and heavy.

But I think that that's an experience I'd recommend to anyone.

OK, so that was kind of Lockheed and Kelly during the war.

Fast forward now to kind of the waning days of World War Two, end of 1944 into 1945.

It's pretty clear that America and the Allies are going to win the war at this point in time, but it's also becoming evidence that there are two

big problems that are emerging, one very immediate and one sort of longer term.

The immediate problem is that in the skies over Europe, in the air theater of the European front,

a new technology is appearing on the German side.

Jet powered fighter planes have begun to pop up.

And we're not a military history podcast, save this for hardcore history and Dan Carlin.

But my understanding of this is that the German jet fighters entered the war too late to make a difference.

But if they had entered service earlier, it would have been a big problem.

So the U.S. and the Allies are like, oh, crap, we need to step up our game and get a jet fleet in service for us ASAP.

And for anyone who's not an avgeek out there or an aviation geek, it's worth knowing.

Going from a prop airplane to a jet airplane is not just incremental.

It's an entirely different technology.

You may have heard the phrase, if you've looked into this before, suck, squeeze, bang, blow.

It is a completely transformative process of how the engine uses the air in order to create thrust that is much more sophisticated than just a propeller.

My understanding is the engines that airplanes were flying before then, even the P-38, as sophisticated as it was,

were basically automobile internal combustion engines.

Totally. So we're observing overseas our enemy has a completely new technology that we have not tamed and mastered yet.

We're at a disadvantage.

So that's one problem. And we're going to focus on that first.

The other problem, to put a pin in for later, and we start to get worried that our ally, the Russians and the Soviets,

our relationship with them might not be quite what we think it is.

We might have to address that in the coming decades.

So keep that in the back of your mind as we go along here.

But let's start with the jet problem.

So the German plane that had started appearing in the skies over Europe was the Messerschmitt Me 262, nicknamed the Swallow.

And it was the world's first operational jet powered aircraft.

It flew close to 550 miles an hour, which is over 100 miles an hour faster than any allied plane,

including the Lightning P-38.

So the US government turns to, of course, the very best person for the job to start the US jet fighter program,

Kelly Johnson and Lockheed.

And they tell him, go make us a jet fighter as soon as possible and by any means necessary.

And when we say as soon as possible, we want to prototype in 180 days with the spec that it must go faster than the German Swallow.

So at least 600 miles an hour.

You need to pull out all the stops, bypass any red tape, do absolutely anything necessary to make this happen.

And for those tracking along at home, 600 miles per hour, not quite the speed of sound, not quite Mach 1, but approaching that something like 80 ish percent to Mach.

Yup. So Johnson hand picks 23 of Lockheed's very best engineers and designers and about 30 of the best shop people, the people that actually build the airplanes and get this.

He rents a literal circus tent to house them in the parking lot next to a plastics factory that is nearby to Lockheed's headquarters in Burbank, California.

And it is because of this that the name skunk works is born because of the outdoor nature in the tent and the smell coming from this plastics factory.

At the time, there was a very popular comic strip called Little Abner and a character in this comic strip had a outdoor moonshine still making bootlegs prohibition air alcohol.

And this still in the comic strip was called the skunk works.

I think it was called the skunk works.

That's right. The skunk works with an O and eventually the publisher of Little Abner sues Lockheed over using skunk works.

So they changed it to skunk works.

So in this circus tent in a parking lot, Kelly and this super elite team from Lockheed build the first prototype U.S.

fighter jet named the Lulu Bell in one hundred and forty three days start to finish.

This is just wild for years.

The U.S. had been working on this technology and they hadn't gotten it operationalized.

The Germans beat them to it.

And then in one hundred and forty three days, Kelly and Lockheed go from zero to flying prototype.

Wow. Crazy.

What a testament to him and to this organization in the circus tent that he has built the skunk works seriously.

So this one hundred and eighty day thing is a very interesting constraint placed on them.

And it means that they immediately need to go to an acquired axiom that we've talked about forever.

Don't do something that's not your core competency.

AKA doesn't make the beer taste better or make the plane fly faster.

Exactly. And outsource everything else.

And if you only have 180 days to do it, you are not going to become an engine manufacturing company.

You are going to look around and say, OK, which of my allies has the capability to just give me an engine.

So they find this British company, Halford, and they take the Halford H-1B Goblin engine.

And that is what they put in this prototype.

Yes. This prototype, the Lulu Bell, would go on to become the P-80 shooting star.

Lockheed would ultimately make about two thousand of them.

And while they weren't really used in World War Two because the war ended, they would be used in Korea and it would be the first jet fighter plane in the U.S.

military. You raise a really important point, though, that we didn't cover earlier about Lockheed and Skunk Works.

They are not engine manufacturers.

All of the engines that were going into the planes before, during, since they're getting from other companies.

And that is true across the aerospace industry.

That's interesting that the value chain evolved this way, where basically no aircraft manufacturers to this day make their own engines.

And commercially, you've got Rolls-Royce, GE, but every single one of these Lockheed planes, the engines are made by someone else.

Yeah, very different from how the automobile industry evolved, where like obviously Ford and GM and whatnot, they're making their own engines.

Yeah. So this amazing feat, building what becomes the P-80 shooting star and the U.S.'s first jet fighter plane in less than six months, this is the beginning of Skunk Works.

And Kelly realizes, hey, this is something pretty special here.

So I want to read a little quote from the Skunk Works book.

That primitive Skunk Works operation set the standards for what followed.

The project was highly secret, very high priority, and time was of the essence.

The Air Corps had cooperated to meet all of Kelly's needs and then got out of his way.

And boy, did they deliver.

So the P-80 would eventually give way to the F-104 Starfighter, which was another invention from Kelly and the team.

Kelly would win the Collier Trophy for this.

So after the war, Kelly says, hey, this is special.

We should keep this going.

And the Gross Brothers and Lockheed's management agree.

And they say, yes, you can keep this, quote unquote, Skunk Works division going, as long as it doesn't take too much money and it doesn't distract from your duties in the rest

of the company, as now the new chief engineer.

So Kelly is both the chief engineer of all of Lockheed and running Skunk Works at the same time.

It's insane.

This not taking too much money thing does become a core tenant of the Skunk Works operation, because you can sort of get around management's ire and management's need to report to shareholders and things like that.

If you're doing amazing things and pulling rabbits out of hats and when it's not going well, you're not a huge burden.

Yeah, so I'm gonna read a little more from Skunk Works here.

So Kelly and his handful of bright young designers that he selected took over some empty space in building 82.

This is a building on the Lockheed campus, which is right next to the Burbank Municipal Airport.

It's an unmarked building, literally like this is a commercial airport that average people are taking off of every single day.

So that it continues.

Those guys brainstormed what if questions about the future needs of commercial and military aircraft.

And if one of their ideas resulted in a contract to build an experimental prototype, Kelly would borrow the best people he could find in the main plant to get the job done.

That way, the overhead was kept low and the financial risks to the company stayed small.

His small group were all young and high spirited, who thought nothing of working out of a phone booth, if necessary, as long as they were designing and building airplanes.

All that mattered to Kelly was our proximity to the production floor.

A stone's throw was too far away.

He wanted us, the engineers and designers, only steps away from the shop workers to make quick structural or parts changes.

Yes, I love this.

I think this is a huge learning, keeping your designers as close as possible to production.

So the game of telephone is as short as possible and is incredibly valuable.

And having the designers being able to glance up at their desk and see like literally the way things are being manufactured so they can say, oh, that looked good in the diagram.

But in practice, you have to bring this big thing around over here.

Maybe we can make that better the next time we design it.

It's just such a great key insight.

The other thing on the small number of people, this gets to the skunk works rules.

And Kelly created this incredible document, 14 rules that we'll link to in the show notes.

Oh, yeah. The third of which I mean, they're all incredible.

The third of which really applies here.

And I quote the number of people having any connection with the project must be restricted in an almost vicious manner.

Use a small number of good people, 10 percent to 25 percent compared to the so-called normal systems.

These people should all be together, all of them building relationships, collaborating, working together to produce the very best product.

And you see this in products in the future, too.

The iPhone, the iPod, I mean, you read the stories about the early teams, there are six, eight, ten people.

They're all full stack.

So there's these unicorns that cross disciplines and they're 10 X, 100 X engineers.

So you really only need a handful of really good people.

All right, listeners, this is a great time to talk about one of our big partners, ServiceNow.

ServiceNow is the platform for business transformation, helping automate processes, improve service delivery and increase efficiency.

Over 85 percent of the Fortune 500 runs on them.

And over the past few years, they've joined companies like Microsoft as one of the most important enterprise technology vendors in the world.

And speaking of Microsoft and ServiceNow, they just announced a huge expansion of their partnership, specifically integrating the two companies, Enterprise AI Assistance.

Starting in the fall, customers will be able to interact with ServiceNow's Now Assist, AI Assistant, directly within Microsoft CoPilot.

Yeah, it's telling for the magnitude of this partnership to see Satya Nadella appearing in the keynote at ServiceNow's big annual event, Knowledge, last month.

Yes, ServiceNow's Now Assist will be integrated with Microsoft CoPilot and will be available directly from Office apps, starting with Microsoft Teams.

The AIs are integrated into one seamless user experience without actually sharing data.

So if, for example, a user asks CoPilot in Teams about how the company's laptop policy works, behind the scenes, CoPilot shares that request and context with Now Assist.

And Now Assist accesses internal company policy with the right permissions for that user and returns the answer to CoPilot in a rich card with options for the user to kick off a workflow via Now Assist.

In the future, Microsoft CoPilot will also be integrated the other way into Now Assist so it can automatically generate office files like PowerPoint presentations and Excel spreadsheets directly from assets and knowledge in the ServiceNow platform.

It's pretty awesome for both companies and especially awesome for enterprise users.

So if you want to learn more about the ServiceNow platform and how it can work with your company's Microsoft services, go over to servicenow.com slash required.

And when you get in touch, just tell them that Ben and David sent you.

All right, David. So what makes Skunkworks work?

Well, to start, all that mattered, literally the only thing that matters is rapid delivery of superior products.

And that was driven by the expedient requirements of World War Two, literally saving America in the free world and then the Cold War, which is going to come in in a big way in a second here.

Listeners might be thinking, isn't all that matters in any business rapid delivery of superior products?

Like, why is this new and unique and different?

The reality, though, is that that's almost never the case.

There's politics, there's personalities.

Well, and you rarely have an existential threat that you must cut through all the red tape.

It's like Operation Warp Speed, the way that we got the vaccines as fast as we did.

If the world is on the line, what can you do away with in your processes and which people can you hand select to solve it?

Competition and existential competition kind of has a way of bringing out the best in people.

So, Ben, you already talked about rule three.

I want to. Did we pick the same ones?

I'm so curious. We got 14 to pick from.

Let's see. Let's pick three that we're going to highlight here.

We already talked about number three.

What are your others?

The next one I want to talk about is the Skunk Works manager must be delegated practically complete control of his program in all aspects.

Yeah, I mean, this is like the auteur theory, like you have to have a single person's vision and the buck stopping with a single person who has ultimate control and isn't a squeezed middle manager.

He's the program manager for any given program that they're working on, any new aircraft.

And also he's the guy flying to Washington to interface with the government.

It's not like he's dealing with the engineers and then calling the sales force and being like, hey, can you go to a steak dinner with our guy in Washington?

No, it's Kelly and at its most productive skunk works, I think was about maybe 50 designers and engineers and maybe 100 machinists and shop people like this is not a large organization.

It's crazy. My last one is the last one of the rules.

Yes, this is one of mine, too, because only a few people will be used in engineering and most other areas.

Ways must be provided to reward good performance by pay, not based on number of personnel supervised.

So Kelly has a quote about this in the book in the main plant.

They give raises on the basis of the more people supervised.

I give raises to the guy who supervises the least.

That means he's doing more and taking more responsibility.

But most executives don't think like that at all.

They're empire builders.

This is so important.

Yep, totally agree.

And in fact, it's thinking like a capitalist, too.

I mean, it's really like how can we achieve the most with the least, not how can we achieve a fixed amount with a fixed margin?

So there's one more thing that isn't in any of the roles, because I think it's just sort of a implicit unspoken assumption.

All of this only works if the small group of people that you've brought together are highly motivated.

And I think the reason this was taken for granted for like all of Skunk Works Heyday was, you know, hey, the mission here is preserving your life and the lives of your loved ones and America from losing World War Two and then, you know, having nuclear bombs dropped on it by the Soviet Union.

You don't really need a lot of extra cajoling or motivation here.

Totally. And you've got to think back.

This was a time where American superiority was not guaranteed.

I think we have a reasonable amount of complacency today.

Americans feel very secure.

Sure, there are enemies, but are we going to be fine?

Totally.

We don't need to think about this that much.

We can decide to prioritize other things and have passions and say, yeah, other people can take care of the national good because, like, we'll be fine either way.

That was not the belief at the time.

No, there's this great quote in Skunk Works where Ben Rich tells the story of his first day in Skunk Works, where he's shown the U2 prototype.

We're going to talk all about the U2 in a minute here.

But literally, day one, he's shown the prototype of this top, highly classified, highly secret airplane that nobody can know about.

He says, the full weight of government secrecy fell on me like a sack of cement that day inside Kelly Johnson's guarded domain, learning an absolutely momentous national security secret just took my breath away.

And I left work bursting with both pride and energy to be on the inside of a project so special and closely held, but also nervous about the burdens it would impose on my life.

This is exactly to your point.

You know, with great power comes great responsibility here.

Yep.

OK, so what are the machines that sort of unfold from here?

Yeah. All right.

So a minute ago, I was talking about the two problems that America and its allies have at the end of World War Two.

One was the jets.

Skunk Works addresses that with the P-80 shooting star.

The other problem is, yeah, we're going to win this war, but there's a whole new war that's just about to start.

Yeah. And the war we're coming out of is World War Two.

But of course, the Cold War against the Russians is just starting.

And this is so hard for us to process today, but doing the research, I really felt it.

I think for a lot of people, the stakes and the pressure and the worry about the Cold War was greater than World War Two.

Yeah, that's a great point.

When the Americans entered World War Two, we had reason to believe that we could come in and win.

The Cold War, I think to the American psyche, felt very different.

I think we had good reason to believe we were not going to win.

So right after the war, Churchill comes to America and gives his famous Iron Curtain speech in Fulton, Missouri, that an Iron Curtain has descended over Europe in the form of the Soviet Union.

And then before the end of the decade, I didn't really realize the timeline on this.

In August 1949, the Soviet Union detonates its first nuclear bomb, and nobody believed that they were going to have the bomb that quickly or that powerfully.

And not only did they have the bomb, but whether this was real or not or positioning, people really believe that the Soviets and Khrushchev's intention is to use the bomb against America.

If they ever believe that they could do so without fear of retaliation, that they could knock us out first, that they would do a first strike and use nuclear weapons on America.

And this kicks off the Cold War arms race, and people probably know and learn about mutually assured destruction and deterrence.

This really was the policy of the military and the American government, that we need to have capabilities to deter the Soviet Union from launching a first nuclear strike against us by being able to guarantee and have them know that we guarantee that if they do so, we will destroy them.

So they can't do this, because if they do, they will be destroyed.

That was the whole policy.

And that's like a really scary place to be.

This is like if somebody over there in the Kremlin decides one day that they think they can win, we're all going to die.

Right. In 1955, there was a national poll that asked the question, what do you think you are most likely to die from?

And over half of America responded that they thought they were most likely to die in thermonuclear war.

Wow.

Above any other cause.

Let that sink in. Over half of the country thought they were going to die in nuclear war.

Horrifying. And so in a war of perception, intelligence is paramount.

Bingo. It is the most important thing, even more important than your ability to strike and wage war.

Is your ability to know what the current state of the opponent's ability is to strike and wage war.

So that means that the battleground is no longer the use of weapons, but the intelligence about the existence and positioning of weapons.

And nobody is better suited than Skunk Works to be the U.S.

Government and military's primary sounds cliche to say, but sword and shield during this war.

Yes. So this brings us to the U-2 spy plane.

And this plane serves such an important purpose that ended up being brought into service in 1955 and was only decommissioned in 1989.

Yeah, incredible.

Now there are many airplane programs that have 10, 20, 25 year timeframes for very different reasons.

Yes, that we will talk about in the military industrial complex.

But the U-2 was basically the first time that America found a plane that it could use for a long time and wasn't rapidly replaced by the next best thing.

OK, so it would be really great if, you know, you could fly a plane over Russia and take pictures and understand all this.

Because there's no satellites yet.

Oh, are there satellites? We'll talk about that a little later.

But you can't just fly a plane into Russia and do that.

It's a closed country. The Russians are going to shoot you down if you do it.

We're not technically at war, so it would violate international treaties to go into their airspace.

We would start the war by doing that.

Exactly. So the first thing that's funny, it's kind of in the news now that China is doing this now.

The first thing we try is unmanned spy balloons.

We send balloons over Russia.

Failed weather experiments.

Yeah, failed weather experiments.

Yeah, that fails on many fronts, including actually returning usable photos of Soviet nuclear installations.

So really, it becomes clear that what's required is an entirely new type of airplane that can either do one of two things and ideally both fly over Russia stealthily and undetected by radar or to fly high enough or fast enough that they can't shoot it down even if they do.

Ed Soskogworks, being the ambitious organization that they are, tries for option one and we don't frankly know very much about what Russia's capabilities are.

So we're pretty sure that we can build some airplane that flies high enough that their radar systems won't detect us.

And great. So let's do that.

Yeah, great. So this is interesting.

What government agency contracts them to do this?

It's not the military. We're in the spy game now.

It's not the Army, not the Navy, not the Air Force.

It's the CIA.

They are building their own air capabilities and all of the work that Skunk Works does here and for many years to come is for the CIA.

So what exactly is the challenge that Skunk Works has laid out in front of them for designing this new spy plane?

Well, at the time, the maximum altitude that airplanes flew was about 40,000 feet.

The U.S. thought that the Soviets best interceptor fighter aircraft could get to about 45,000 feet.

Yeah. And we also thought that their radar wouldn't function above like 55,000, right?

We were like, all right, as long as we clear 65,000, we should be higher than their radar could even detect and certainly higher than their fighters could come get us.

Right. So the CIA's spec for Skunk Works for the U-2 is to fly at 70,000 feet.

Now, there are a couple of problems with that.

One is that normal jet fuel doesn't work at that altitude.

You know, at that altitude, the pressure, the temperature, everything about the environment, you're getting to be closer to space than you are to normal Earth atmosphere and things start going wrong.

So that one, they actually subcontract with shell oil to make a new formulation of jet fuel that does work up there.

So, you know, that problem is solved.

Problem number two is maybe a little bigger and that is that humans cannot survive at that altitude.

So certainly you need a pressurized cabin, but if something were to happen and you needed to be out of the cabin, you know, cold, no air, blah, blah, blah.

Yeah. And I don't know the technical details, but I think even the cabin pressurization technology that existed then was not going to cut it at 70,000 feet.

So you basically need a space suit.

Exactly. Some of this technology came from like diving suits and some other things that came before this.

But I think this was the big coming together of the technology that created the space suit.

And that's what they put these pilots in.

Wow. So Lockheed and Skunk Works win the contract from the CIA.

They start working on this plane in sometime in 1953.

Incredibly top secret.

We wouldn't reveal the fact that this existed to the Russians, our own people for years and years and years.

I mean, this is like the quote from earlier that we read from Ben Rich when he started working on this project day one and saw the prototype and then it hit him like a sack of cement, you know, how important this was.

So Skunk Works completes and delivers the plane by July 1955.

So like a year and a half and for a total project cost of three and a half million dollars, that's an M, that is not a B, a year and a half and three and a half million dollars for one of the most important products and pieces of technology in American history.

Astounding.

This is what Skunk Works is capable of.

So they're flying higher than any plane has ever flown before.

They're using a different type of fuel.

People are flying in spacesuits for the first time.

Feels like to be a reconnaissance aircraft, you would also need one other key component in order to achieve the mission of spying on the enemy.

Yeah. To take photos, you need a camera.

Indeed. And you would need an all new type of camera with all new type of lens capable of taking photographs of something 70,000 feet away from you through, you know, a whole bunch of atmosphere.

Gosh, if only the US had someone who is just incredible at this sort of pioneering optics technology.

Indeed, the US did.

And that was Dr. Edwin Land and the Polaroid Company who subcontracted and created all of that.

And actually, I believe it was Edwin Land himself that helped convince President Eisenhower to even pursue this project in the first place.

He was like, we can build the camera that can do this.

If we can get the airplane built, we can do this project.

This blew my mind. It is so cool to see the intersections of different innovators throughout history.

I mean, Edwin Land is the man who inspired Steve Jobs and he's building the U2's camera.

Oh, just wait. We are going to have a lot more tech in Silicon Valley and Apple stuff that's going to come up here in just a little bit.

So they built the plane.

You got to test this thing.

They're not going to roll it on the runway in Burbank and take off and, you know, just head for the Soviet Union.

You got to test it. And, you know, it's got to be secret of whatnot.

And remember, Kelly Johnson, one of his big principles is like we test our products.

You, the government, don't test our products.

We test our products.

And we should be clear. This U2 spy plane looks crazy.

It has a hundred foot wingspan.

Yeah. This thing, if you saw it taking off, you would be like, OK, I've seen airplanes.

That thing is completely different.

So it's not like they could disguise it like you need to figure out somewhere in the United States where there's basically nobody so that you can test this thing.

This is so fun.

The smile on our faces is like you can't see us, but it is stretching out of the room here.

Yeah. You can't just paint this thing like a school bus and pretend it's something else.

So they need to find a suitable test site.

They go scouting all across the Western U.S.

and kind of remote areas.

Kelly Johnson is sort of like Sam Walton in his prop plane, scouting out for, you know, Walmart locations, flying sideways.

And then they get an idea.

And that idea is where is a place where even if there were people before, there sure aren't people now because nobody in their right mind would want to be anywhere close to where we just tested our nuclear bombs.

And they go, oh, as long as we figure out that it's safe, that would be a perfect place for us to test this airplane.

So they find a dry lake bed in Nevada called Groom Lake.

And there's a quote from Kelly Johnson here about this in the book.

We flew over it and within 30 seconds, you knew that this was the place.

It was right by a dry lake, man alive.

We looked at that lake and we all looked at each other.

It was another Edwards, like Edwards Air Force Base.

So we wheeled around, landed on that lake, taxied up to one end of it.

It was a perfect natural landing field, as smooth as a billiard table without anything being done to it.

How insane is it that this is where we were testing nukes?

I actually do not understand how there was not radiation poisoning.

And I don't fully understand the half-life and all that needs to be done.

But like, how is that safe?

Yeah, it's insane.

And not only were there recently nuclear tests happening right nearby, I believe that nuclear testing can

continue right nearby while they're using this site, Groom Lake, to test the U-2.

100 percent. It's the craziest thing.

They had to like sometimes take some time between the most recent nuclear test and when they wanted to go fly.

Because these sites are like, I don't know, 12 miles away from each other or something pretty close.

If you're curious listeners, there's this great documentary on Amazon called Secrets in the Sky, the untold story of Skunk Works that has a bunch of footage of all of this.

Wow. So, listeners, if you haven't caught on already, the location that we are talking about,

a Nevada test site in the middle of the desert, nuclear, some really strange looking flying aircraft.

This is Area 51. Skunk Works creates Area 51.

And of course, there's rumors of UFOs there.

They want to keep everyone away for the people who they can't keep away.

They're going to see some really weird flying stuff.

So, of course, the rumors are going to start.

It's all goodness for Skunk Works.

This cover is great.

Oh, it's even better than that.

I can't remember which plane or when this was, but at one point in time, one of the test flights crashed and the pilot survived and like somebody saw him.

He was wearing a spacesuit.

Nobody knew what a spacesuit was.

Of course, he looked like a freaking alien.

Right. It would be another 10 years before we would have the moon missions.

Yeah, that's so funny. Amazing.

Yeah, it's all Skunk Works in the U-2.

Wow. And then the Blackbird and everything else we're going to get into later in the story, all happening out of Area 51.

The prep work that the pilots had to go through before getting on these planes, too, were nuts.

They needed to breathe pure oxygen for two hours to remove all the nitrogen from their blood in case they had to eject.

Because remember, these are test pilots on a super experimental aircraft.

They were often ejecting or they were often, you know, things went wrong in these tests.

Yeah, a bunch of people died doing this, like we should say.

Yeah, I mean, a great sacrifice to bring this program and subsequent Skunk Works programs into the world.

But basically what was happening is if you didn't breathe pure oxygen for two hours, you could get the bends, you know, for anyone who scuba-dived and you can't fly right afterwards from ejecting.

And so it's like, well, if you managed to get out of the aircraft before it crashed, then that could kill you.

So you needed to make sure that this sort of oxygenating of your blood and getting rid of all the nitrogen made it so that if you did need to eject, then you would survive this as well.

Yeah, crazy.

OK, so they test the U-2 at Area 51.

So great.

They get it up and running and in active service as an operational spy plane, pretty much the world's first, at least of this type, within a year.

The first Soviet Union overflight happens on July 4th, 1956.

Of course it was.

Of course it was July 4th.

Now, this is so interesting.

There's a whole bunch of things that happen when they take out, like they don't know what's going to happen.

Is this thing going to work?

Are the Soviets going to see us?

Like, we're going to learn so much here.

You can't script this stuff.

The Soviets tracked it on radar, even at 70,000 feet.

The whole way.

Right from it takes off the whole flight path through Russia.

They knew everything that we were doing.

We were super wrong about their radar.

They didn't just have low altitude radar.

They were capable of radar that could see straight up into space.

Wherever we were flying, they were going to see us.

Yeah, which we had no idea.

So we learned this as part of it.

So here's what's funny.

We know that they see it from takeoff.

They track the U-2 the whole way.

This whole top secret program like, oh, no, it's busted.

They see it, but it turns out they can't hit it.

So, you know, a whole bunch of fighter jets scramble and the fighter jets,

they can't get up that high so they can't intercept it.

They launch surface to air missiles.

The missiles can't hit anything that high up.

So the U-2 just flies along.

They're tracking it the whole way.

There's planes flying along behind it and they can't do anything.

But at least we get the intel now in the U.S.

that, OK, they can see up here.

And so it's probably just a matter of time before they're capable

of shooting something down up here, too.

Yes. But here's what's so interesting.

Remember, this whole war, like, God, it's fascinating.

It's a war, but it's not a war.

It's a war of perception.

So in that flight, we get incredible photographic observational evidence

and we would fly so many missions over Russia for the next few years

getting this incredible intelligence.

The Soviets never say anything because if they were to say anything

and say that they tracked us into it, then they would be admitting

that they were powerless to stop it.

This war of perception, like, it's so crazy, the incentives and motivations here.

But it makes sense.

They're not going to say anything and reveal the program.

So it remains top secret because if they did, their sort of position

and posturing of strength would be compromised.

And neither country really wants to be at war.

So we're both maintaining this.

We're not at war, you know, and we're not going to tell you that we're preparing

for if we need to be.

But of course, we're going to do whatever we can to understand the best

about our enemy or not our enemy or other countries that we're not at war with.

Adversary. Right.

And I actually think there may be, you know, military historians

that understand this better than us.

But I think this was actually an optimal outcome for the U.S.

Because remember, just like you were saying, Ben, nobody actually wants to go

to war here. The goal is for both sides to keep each other in check.

And so this, the U-2 and these reconnaissance missions, become a major

chess piece for us on our side of the board to keep the Soviets in check.

We like this state, I think, that they know about it, but nobody talks about it.

The other crazy thing is this camera is incredible.

If you look up photos taken by the U-2 spy plane, it is remarkable

what in the mid 50s this thing was capable of taking photographs of from 70,000 feet.

The engineering all around that went into this is just incredible.

I mean, you could do a whole podcast just about the technical aspects

of the engineering advances.

And it basically works.

They find a whole bunch of nuclear test sites.

They find where missiles are kept.

We basically have a real time count of the Soviet Union's warheads,

the Soviet Union's fighter jets, the capabilities that they have

with their radar because it's painting our airplanes.

So we now know that that exists.

Mission accomplished in spades on this thing.

We talked earlier about the cost of three and a half million dollars.

I think you could make an analogy to like the Louisiana purchase

in terms of like best deals that the United States government ever got

relative to like the benefit to America.

This is arguably the last great deal they got from Lockheed Martin.

But well, no, there's some more that we're going to talk about in a minute.

So this all continues.

We fly dozens, maybe hundreds of U-2 missions over the next few years.

The Russians are constantly trying to shoot them down.

They fail. Nobody says anything.

And then on May 1st, 1960, ironically, on May Day,

we launched the U-2 program on July 4th,

and it ends at least over the Soviet Union on May Day, 1960.

The Soviets finally have developed a missile

that can reach 70,000 feet with accuracy and they shoot down a U-2.

This was the first time in history that a ground to air

missile had shot down an airplane.

I didn't realize this. I read that. I was like, oh, whoa.

I guess maybe the technology didn't exist during World War Two, the Korean War.

And so this was a major historical moment in so many ways.

America and the CIA and the government, the president, they're like, OK.

Right. What do we do?

America's posture is we were never there. Right.

But we know now that the motivation for Russia not to talk about it now is gone.

Now they can position this as like, hey, we're so strong that we can keep people out.

We expect them to say something right away a couple of weeks go by.

They say nothing. Quite surprising.

All we know is we've lost contact with our pilot

and we didn't see them come back and land.

So we presume that they shot down our pilot, but they're not saying anything.

But we don't really know.

And we presume that if this plane was shot down, as we think probably

the pilot was killed, I mean, like you shoot down a plane from 70,000 feet.

Right. Probably the pilot was killed.

Well, that's 14 miles in the air.

Yeah. No, the pilot was not killed.

The pilot's name was Francis Gary Powers.

Pilot Powers.

If you know anything about US history, you probably know his name

and you probably know that he miraculously did survive

and was captured and interrogated and probably tortured by the Russians

and that this was the revealing of the U2 program.

So what happens?

Turns out that there was a big summit in Paris scheduled

for later in May between Eisenhower and Khrushchev.

And Khrushchev announces on the eve of the summit

that they have captured an American pilot.

They have captured this new plane that the US has been illegally

and in a provocateur manner flying over Soviet airspace.

They have defended their country and shot it down.

And this creates a huge mess.

Eisenhower first denies this and then admits it when we realize that,

like, oh, shoot, this pilot is still alive.

He's confessed like, wow, this is a disaster.

Yeah. So I guess there probably was a path

where this could have led to escalation.

Fortunately, it does not.

But it does mean that the U2 program,

at least over Russia, is done.

We don't fly any more U2s over Russia.

We can't. I mean, if we were to do it at this point, we know they can see us.

They now can talk about that they can see us and they can shoot us down.

Like, it would escalate to war if we kept doing this.

We have to stop.

The U2 becomes quite useful for other locations around the globe,

but not over the USSR itself.

This, though, is a huge, huge problem.

This was the most important thing in the war.

And now it's gone, right?

We now have no way to take photos of military sites in Russia

because we can't fly planes over there anymore, right?

We're blind. What do we do?

What do we do?

Well, the world would not know until 1995

when this would all become declassified under the Clinton administration.

But that was only true for about three months,

thanks to another super secretive Lockheed division

that figured out another way for us to take pictures of the Soviet Union.

Yes. And this, listeners, is where if you've read Skunkworks

or watched documentaries about Skunkworks,

what we're about to talk about is not in any of those.

This is a completely separate story that takes place in a different place

in California that is a detour from our Skunkworks story.

And we'll be back because, my God, did Skunkworks do some incredible things

after the U2.

But before we do that, we want to take you to Northern California

and the origins of Silicon Valley and Lockheed's participation in that.

We want to thank our longtime friend of the show, Vanta,

the leading trust management platform.

Vanta, of course, automates your security reviews and compliance efforts.

So frameworks like SOC 2, ISO 27001, GDPR and HIPAA compliance and monitoring.

Vanta takes care of these otherwise incredibly time and resource

draining efforts for your organization and makes them fast and simple.

Yeah, Vanta is the perfect example of the quote that we talk about all the time

here on Acquired, Jeff Bezos, his idea that a company should only focus

on what actually makes your beer taste better, i.e.

spend your time and resources only on what's actually going to move

the needle for your product and your customers and outsource

everything else that doesn't.

Every company needs compliance and trust with their vendors and customers.

It plays a major role in enabling revenue because customers and partners demand it.

But yet it adds zero flavor to your actual product.

Vanta takes care of all of it for you.

No more spreadsheets, no fragmented tools,

no manual reviews to cobble together your security and compliance requirements.

It is one single software pane of glass that connects to all of your services

via APIs and eliminates countless hours of work for your organization.

There are now capabilities to make this even more powerful.

And they even integrate with over 300 external tools.

Plus, they let customers build private integrations with their internal systems.

And perhaps most importantly, your security reviews are now real time

instead of static, so you can monitor and share with your customers

and partners to give them added confidence.

So whether you're a startup or a large enterprise and your company is ready

to automate compliance and streamline security reviews like Vanta's

7,000 customers around the globe and go back to making your beer taste better,

head on over to vanta.com slash acquired and just tell them that Ben and David sent you.

And thanks to friend of the show, Christina, Vanta CEO, all acquired

listeners, get $1,000 of free credit, vanta.com slash acquired.

OK, David, so I had forgotten about this story.

I knew a little bit of it from watching Steve Blank's great talk

maybe five, eight years ago, the secret history of Silicon Valley.

But you sort of found the last 20 minutes and then just dug in like a splinter

on this particular moment in history and how it is all tied in to Lockheed Martin.

So where are we going?

Yeah, well, and it's even lesser known than that.

Only certain versions of that talk that Steve has given

contain the Lockheed story because so much of it has only recently been declassified.

A lot of it, even after he first started giving this talk.

So what really turned me on to this was some of the chapters in Beyond the Horizons.

Even though that book was written in the late 90s, I started digging in and then

I started watching some YouTube videos with some of the people involved in this.

And I was like, oh, my God, there is this incredible story here that we don't realize.

Yes, in typical David Rosenthal fashion, you sent me a note the other day

and said you have to listen to this starting at eight minutes and 50 seconds.

And I was like, what is this? And I click and it's a guy at a podium

with a terrible recording set up from the IEEE Silicon Valley history video.

So Industry Association.

This thing has one hundred and twenty four views after being posted seven years ago.

Incredible. This stuff is buried.

I honestly can't believe it.

And I'm so glad that we get to tell it here.

All right, let's set the context.

So if we rewind back to World War Two,

one thing we kind of mentioned here now as we were talking about the U2

and the Russians tracking it on radar, but we didn't talk about during World War Two

was the importance of radar.

Now, so much of World War Two was an air war both in Europe

and then especially in the Pacific.

And the development of both radar and anti radar technologies

was paramount in the war efforts.

Yes, there was lots of land based fighting and tanks and all that stuff.

But World War Two was the first real air war.

And obviously, that importance of radar continued into the Cold War,

just like we were talking about with U2 flights.

Now, during World War Two, where was all of the US

and allied radar work and research being done?

It was primarily being done out of two institutions in Boston,

MIT with the Radiation Laboratory or the RAD Lab

and Harvard with the Harvard Radio Research Laboratory.

Now, here's what's interesting.

Neither of these two labs at MIT and Harvard existed before the war.

The government directed MIT and Harvard to set them up as part of the war effort.

They didn't exist before and then MIT and Harvard,

very fortunately for California and Silicon Valley, shut them down after the war.

Now, it turns out that the head of the Harvard Lab

was a professor named Frederick Terman.

Might ring some bells for people, especially people who went to Stanford.

Terman was probably the world's leading expert on radio engineering

and also vacuum tubes and early computing.

Except Terman wasn't actually a Harvard professor.

Terman was a Stanford professor.

He was just on loan to Harvard during the war years

because that's where the government set up the radio labs.

And the government allocated millions and millions of dollars of funding

to Harvard and MIT and something like $50,000 to Stanford.

All of the funding for this was Harvard and MIT.

Yes, they assembled all of the world's experts.

And Terman was arguably one of, if not the leading world expert in radio engineering.

Assembled them there in Boston, I guess in Cambridge at Harvard and MIT.

Cambridge residents would get mad at us if we say Boston.

So after the war, Terman comes back to Stanford because Harvard shut down the lab.

He comes back to Stanford and he does three things.

First, he recruits away all of the best people that he worked with

at the Harvard Radio Lab from universities all over the country.

He recruits them to Stanford and he gives them tenure immediately.

Yes.

He's like, I want to make this deal as sweet as possible for you because I want to

will Stanford into existence as an engineering institution.

Yes, of the highest order.

So that's one. Two, soon after he gets back to Stanford,

he becomes the provost of the entire university.

And as provost, he completely changes the way

tech transfer is done at Stanford.

No other university has as good of a tech transfer policy as Stanford.

They're notoriously friendly.

Yes, notoriously friendly and everywhere else, including Harvard, MIT, Princeton,

blah, blah, blah, notoriously unfriendly and hard to work with.

The classic story is Stanford owned 1 percent of Google at spin out,

which ended up making them an ungodly amount of money because of how big Google became.

And if that were at other universities, they would have said 50 percent is what we need to keep

or 33 percent is what we need to keep.

And they would have smothered the innovation before it could become commercially viable.

Now, I sort of in the back of my mind knew this because I had watched Steve Blank's talk many years ago,

but I kind of forgotten. I just thought it was like, oh, well, that's because Stanford and Silicon Valley, like we get it.

We're smart. Not that we're smarter, but there's this attitude of, you know, if you're in Silicon Valley, even to this day,

you're like, yeah, we get how the culture works here.

And like the East Coast doesn't get it.

As if this somehow existed a priori because it was just in the water and came from nowhere.

Not at all.

It's all things determined and World War Two and his experience at the radio lab.

When he becomes provost, he's still a super devoted patriot.

He knows how important this work is that it was during World War Two.

And he knows it's just as if not more important during the Cold War.

So what he does is he encourages students and professors to leave Stanford and go set up companies and work for defense firms and work for the military.

Not to make money, but to be like in the nation's service.

Take the research and the people who are doing the research out, start a brand new company.

He would try to help you find funding, which at that point, venture capital didn't exist.

So he was introducing you to customers who could sort of preorder from you to fund your research.

And he basically believed that a commercial ecosystem leads to more innovation than one that is purely happening in academia

and thus could better serve the needs of the nation.

Customers.

Customer.

Hang on to that thought for one second.

If you were doing all of this 10 years before, the university would have looked at you and said, what are you doing?

You're encouraging this stuff to go away from us.

It would have been career suicide in academia to do this.

Instead, at Stanford, it becomes the best thing you can do for your career.

Because in Terman's mind, it's the best thing you can do for your country.

Okay, so that was number two.

Number three, he carves off a big part of the Stanford campus.

Now, if you've ever been to the Stanford campus, my God, I was so lucky to spend two years there.

It's like paved in gold.

It's literally Shangri-La.

They have so much land.

It's the most beautiful, like idyllic place in the world.

And like 80% of the land is still undeveloped.

Yeah, they own like all the way out to the ocean, I think, like it's crazy.

So he carves off a part of the Stanford campus and develops it to be leased out as

commercial space to corporations and the government to come people to start companies,

companies to come to build to participate on this ecosystem all right there on campus.

It's initially called the Stanford Industrial Park.

Today, it's called the Stanford Research Park.

It still exists.

If you've ever been there, it's basically all of the office buildings up and down

H Mill Road in Palo Alto.

So it's HP and Hewlett Packard.

We'll talk about that in a minute.

It's Tesla's landlord today.

It's VMware.

It's where Xerox Park was.

It's where Next was in Steve Jobs.

It's where Facebook's office was for a while.

This is where Theranos was.

My God.

So you might be like listening like, well, this is cool.

Maybe I knew this stuff.

Maybe I didn't.

This is really fun.

Silicon Valley history.

What does this have to do with Lockheed?

Well, one of the very first tenants of Stanford Industrial Park, then you're

talking about customers, customer who would go on to become the single largest

employer in the area in proto Silicon Valley by a huge margin was a new secret

division of Lockheed.

This blew my mind.

The secret division is called the Lockheed missile systems division later to be

renamed the Lockheed Missiles and Space Company and what LMSC Lockheed Missiles

and Space Company did.

I honestly think like it is bigger impact to the country, to the world, and

certainly on business to Lockheed and to Silicon Valley than Skunk Works.

This story is of a scale.

I don't know that we've ever really told on acquired.

There are a lot of Skunk Works devotees, David.

That is quite the assertion to say that this is a bigger deal.

Well, let's talk about it.

Listeners, you can judge.

They patterned themselves after Skunk Works and took so many of the Skunk Works

management principles up to Silicon Valley.

I was reading Skunk Works.

I'm like, oh yeah, so many of these principles, they sound like Silicon Valley

principles. Well, there's a reason for that.

So Lockheed makes the decision to start this new missile systems division in 1954,

but it becomes so much more than that.

Obviously, this is also top secret stuff, just like Skunk Works.

So just like Skunk Works, they set up the new missiles division in Burbank.

Also in an unmarked building, they literally just copy paste Skunk Works

right there in Burbank.

And so it starts in Southern California.

It does. But there's two problems with that.

First, it's kind of unwieldy for a big company like Lockheed to have not one,

but two super secret unmarked divisions right there on the main campus.

You know, they aren't supposed to know about each other or anything else

going on like you start getting into weird territory quickly.

But it's important that the missiles division did start there because they

took, as I said, a lot of Skunk Works management practices.

The bigger problem is that it turns out that building missiles is a very

different discipline than building airplanes because unlike airplanes,

you don't have a pilot in the missiles.

So you need missiles guidance systems.

And that means that you need radar and you need computing.

And those two things are not what Southern California is good at.

But you know what's really good at those things.

Fred Terman up at Stanford and everybody that he's recruited, literally

the best minds in the world at all of that who are now at Stanford and who

are now being encouraged to go spin out and start companies who might just be

subcontractors to a big missile system that you're trying to build.

Interesting. And this is cool.

This is a part of the research that you did that I don't know much about.

Yeah, this is great.

So the next year in 1955, Lockheed moves the missile systems division out of

Burbank and up one on one to the Stanford industrial park, the very same

Stanford industrial park that Fred Terman just carved out of the Stanford

campus and developed on Page Mill Road.

And Lockheed becomes one of the very first and biggest tenants of the

year and is still there to this day.

Now, they can't actually do everything they want to do on the Stanford campus.

You're not going to build a missile and test it on the Stanford campus.

So Lockheed pretty quickly after they established themselves in Palo Alto,

they also buy 275 acres just down the road in Sunnyvale and they build a

huge campus there, 137 buildings.

So when Lockheed buys this, the population of Sunnyvale is less than 10,000

people. What Lockheed built Sunnyvale?

I didn't realize that.

Wow. So how many people would eventually work in Sunnyvale at Lockheed?

So by the end of the decade, in 1959, just four years later, Lockheed

missile systems employs almost 20,000 people in Palo Alto and Sunnyvale.

And a few years later, by the mid sixties, they would employ 30,000 people.

This makes Lockheed by far the largest employer in this brand new

proto Silicon Valley. I mean, remember, I just said Lockheed built Sunnyvale.

You think of Sunnyvale, Silicon Valley today, like Yahoo and Intel and all that.

Cisco.

There was none of that. Lockheed built it.

So Hewlett Packard was the largest tech company, computing company,

Silicon Valley company at the time Hewlett and Packard were students of Fred

Terman and Fred encouraged them to spin out and start Hewlett Packard.

They were the largest new tech company. They only had 3000 people. One, two,

three. Lockheed had 30,000 people. Whoa. Oh my God.

It's funny story. I knew at least as of 2009 that the Lockheed campus in

Sunnyvale was large because when I was interning at Cisco,

I went on a run one morning and I was just sort of like exploring around and I

ran into a Lockheed's campus and I got chased down by a security guard who's

like, well, you can't just run in here. And I had my headphones in.

I thought I was in big trouble.

Yeah. They had this huge structure called the blue cube that has since been

disassembled. It's not there anymore, but you know,

you need a like big hanger that you're going to build missiles in and they end

up building a lot more than missiles we're going to talk about.

And you mentioned they need radio and they need computing.

Computing basically wasn't a thing yet. I mean,

Shockley co-invented the transistor just a few years before started Shockley

Semiconductor in 1955, the same time as Lockheed is coming to Silicon Valley.

Right. And of course, Shockley is a predecessor to Fairchild Semiconductor,

which is a predecessor to Intel. So like they've got Terman's radio

background, but there really weren't any people with compute experience yet.

That was all happening concurrently all around them in Sunnyvale and Palo Alto.

So we talked about this a bunch, actually,

on the first Sequoia Capital episode when we were telling Don Valentine's story.

And at the time when we were telling the story, we were like, oh, you know, Don,

he was so legendary before he started Sequoia.

He was the head of sales at Fairchild Semiconductor and the head of sales at

National Semiconductor. And we sort of glossed over to, we were like, yeah,

you know, he was mostly selling to defense companies.

Well, who do you think he was selling to?

I mean, he was selling to defense company.

Yes. Now he was also selling around the country to other defense contractors too.

Lockheed wasn't the only company that was working on missiles,

but I think they were the only one that was working on missiles in Silicon Valley.

Wow. And by God,

did they buy a lot of product out of all these startups and all of these

silicon startups that are coming out of Stanford and coming out of Shockley and

just getting sprung up right there in Silicon Valley.

I can't believe that there were 10 times more employees at Lockheed in Silicon

Valley than at HP in the late fifties.

Yes, it is totally insane.

And so many people came through Lockheed into Silicon Valley,

including one Jerry Wozniak,

who moved himself and his young family out to

this new Silicon Valley to become an engineer at Lockheed

missiles and space company. That's right. Woz's dad.

The reason that Steve Wozniak grew up in Silicon Valley is directly because of

Lockheed Martin. Oh, that is awesome. No Lockheed, no Woz in Silicon Valley.

No Apple, no Apple. Crazy.

Not to mention there's a really interesting point here,

which is you wouldn't have this open commercial spirit to Silicon Valley

without term and without the belief that the right thing for America was for all

these companies to become companies instead of academic research or spread around

in other parts of the country.

It creates the Silicon Valley ethos and creates Silicon Valley as the place where

that ethos would thrive.

And it's worth pointing out for people who don't spend a lot of time in the Bay

area. This has absolutely nothing to do with San Francisco.

Nowadays, it's sort of this big blended soup of companies that have offices in

both places and you can drive or take the tech how train between them.

Yeah, that's a recent phenomenon.

San Francisco is a completely different universe at this point that is in zero

part responsible for the growth of Silicon Valley.

Yeah. And before this time, before the fifties, there was no Silicon.

It was called the Valley of Hearts Delight. That was the name for it.

It wasn't Silicon Valley.

Huh, wild.

OK, so what was Lockheed actually doing there?

We talked about them working on intercontinental ballistic missiles, ICBMs

and missile defense systems.

I think they probably did continue to work on that.

But there were two projects that this new division of Lockheed took on that really

changed history and both of them together became for Lockheed at least and the

parent company by far the biggest driver of profits for the coming decades.

And really, as we'll see, this division, you know, not skunkworks, this division

kept Lockheed alive. Lockheed would have absolutely died without this division.

So what were these projects?

One went up to space, as perhaps is obvious and we foreshadowed and literally

is in the name of the company, the Lockheed Missiles and Space Corporation.

And the other one went down under the oceans.

So let's talk about that one first, because I think it happened first chronologically.

So submarines had obviously been a thing since World War Two and even before that,

back to World War One, there's lots of advantages to submarines during wartime.

They're stealthy.

They can basically travel anywhere in the world.

You can stay hidden for long periods of time, especially once nuclear

submarines are developed that can stay underwater for months at a time, self-powered.

They're both a great offensive and a great defensive weapon during periods of active war.

But during the Cold War, they're kind of useless because if you wanted to have a

chess piece in position to strike a land based target, if you could even do that at

all with a submarine, you got to get the submarine pretty dang close to the land,

which means close to Russia, which means they know you're there and that's a provocation.

Hmm.

Unless somebody could maybe somehow figure out a way to fire an intercontinental

ballistic missile out of a submarine and go up into, you know, the air and into space

and then hit a land based target far, far away.

Now, this seems crazy.

It's hard enough to make this happen from the ground.

You're talking about doing this from the sea with all the like waves and the lack of

stability.

No way this could happen.

This thing has to thrust through air after it thrusts through water.

Oh, well, you're making the leap already that you would fire it underwater at first

when the Navy contracts Lockheed to work on this in 1955 to build the Navy's fleet

ballistic missile system.

It's FBM.

The idea is they're going to fire these things from the surface of the ocean.

The submarine is going to rise up.

They're going to like stabilize it in water and they're going to fire off a missile

from the deck of a ship or a surface submarine.

You could imagine another issue, which is these things have rockets on them.

So you have to not destroy the launch pad, which is the submarine full of American

humans while launching it.

Yeah, this is a big challenge.

The reason that it was worth trying was that if you could create a naval based

intercontinental nuclear strike capability, it completely changes

the strategic landscape of deterrence and first strike versus second strike and

retaliation.

So what we were really afraid of, we thought the Soviets would pursue a first

strike policy if they felt they were able to.

The way that they would do that is if they felt that they could in that first

strike, knock out all of our nuclear capabilities, if they could target all

of our land based ICBMs, incapacitate them, then we would be incapable of

responding with a second strike and then they could blow up our cities and whatnot.

Now, if all of a sudden you have a mobile naval based missile system, well, that

completely changes the chessboard.

It's quite the deterrent.

Quite the deterrent.

You can now pretty much guarantee as long as you can keep a fleet of nuclear

submarines operating at all times that you can't take them out and they can

move around and be anywhere.

And so if you launch a strike, they're going to launch right back and first

strike is now off the table.

This is a huge strategic win.

If you could put this actually operationally in practice, the other

medium, if you will, location that could change the dimension to for doing

this would of course be space.

If you had nuclear missiles up in space, that also changes the dimension.

And this among many, many reasons is why when the Soviet Union launches Sputnik

into space in October, 1957, even though Sputnik itself was far from having

nuclear ICBM capabilities, the Soviets getting to space first was truly terrifying.

I can't imagine how disconcerting it is in an era that, you know, now there are

tens of thousands of satellites orbiting the earth all the time when that was a

brand new thing, when you could look up at night, if you could see Sputnik and

you're like, oh my God, that thing any day now could have a nuke aimed at us.

Right.

Okay, so back to the sea.

It turned out like we were talking about a minute ago that firing ICBMs from the

deck of a surfaced ship, be it a submarine or otherwise, bad idea, basically

impossible, but firing missiles from under the ocean was doable and Lockheed

did it with the help of Silicon Valley.

So in December, 1955, the Navy awards this contract to Lockheed.

The name of the project was Polaris.

People might've heard of Polaris missiles just over four years later, after the

contract is awarded in 1960, the very first US nuclear ballistic missile equipped

submarine sets sail on its patrol and everything we just talked about is

operationalized, equipped with Lockheed Polaris A1 under sea fired nuclear

warheads, ballistic missiles could reach land based targets up to 1200 nautical

miles away from wherever the submarine was when it launched it.

And it was all built out of Silicon Valley with many subcontractors all over

the place.

I'm assuming Lockheed doesn't actually make the nuclear warheads, right?

Like that was still happening in national labs at Sandia and all the places that

were pioneered during World War Two.

Yeah, Lockheed did not make the submarines nor did they make the nuclear

warheads.

I think a lot of this work was done out of Sandia, which we talked about in the

Amazon episode.

Oh yeah, Bezos' dad worked there, right?

Grandfather, Bezos' grandfather was the head of Sandia, which was in New Mexico.

The military nuclear program, the division of the US overall nuclear program, I

think was out of Los Alamos, but Sandia was the military arm of it.

Which weirdly, Lockheed for many years actually had a contract to manage Sandia

because there's some sort of strange partnership that happens where the

federal government hires government contractors to manage national labs.

Yeah, to enable this strategic chess piece, the key thing is the missiles.

Nuclear submarines already existed, nuclear warheads already existed.

The challenge here was create a system by which you could launch a missile from

under the ocean out of a submarine.

Man, I just got to say it is so fortunate and insane to me that neither side ever

launched. All the deterrence for all the scary things that could have come out of

it and all the itchy trigger fingers and everybody getting close, it never

happened. That is a big applause to humanity that we could have done this and no

one did.

Well, this is one of the things that I mentioned at the top of the episode.

Doing this research sort of changed my mind on the war machine aspect of Lockheed

and the military and the military industrial complex.

But I think people really believed and I think there's a good chance this was

reality. It was building all of these systems and advancing all of this

capability that prevented it from being used.

If we hadn't built this stuff, there's a good chance Russia would have done a first

strike.

Yeah, it's crazy.

OK, so Lockheed after four years successfully does the underwater ICBM launch.

Yes. And then that quickly leads to more successor programs and developing the

technology further.

The Polaris becomes the Poseidon is the next program and then the Trident.

The Trident missiles had a 5000 mile range and carry a hugely destructive nuclear

payload. Unbelievable.

Terrifying.

All right. So we just told this incredible story about LMSC taking Silicon

Valley under the ocean.

This program, you know, Polaris Poseidon Trident for most people listening,

especially if you're American, these names aren't surprising to you.

You've heard of these programs.

You are aware that the U.S.

starting in the 1960s had nuclear submarines carrying intercontinental ballistic

missiles.

Yep.

It was, if you think back to the kind of the chess game, it was in the government's

best interest for the Soviets to know that we had these.

The point was deterrence.

In fact, we probably should have bragged about this even if it wasn't real.

Right. Maybe it wasn't. Who knows?

We should have had inflatable subs floating around that we thought were nuclear.

Maybe it's all the cover.

Maybe all the money that went into Silicon Valley.

No, I don't think that was the case.

Either way, you don't want to find out.

Speaking of cover, do you know about the things we did on top of the factories when

we were building airplanes?

Oh, yes. And Disney was involved.

Yeah. Starting way back in World War Two.

But I think continuing after that in the Burbank facilities at Lockheed, I know

Boeing in the Seattle area and other places, too, built basically these burlap

cities on top of factories that looked like suburbs, complete with 3D cars and

trees and stuff so that anybody who was creating a spy plane and flying overhead

would mistake our manufacturing facilities for something innocuous.

Yeah, I think it was spy planes and also during World War Two bombers, if bombers

ever made it to the West Coast, that they wouldn't know where to bomb.

And I'm pretty sure that Disney Imagineering was involved in creating these sets

like they made for Disneyland.

It's crazy how sometimes it's in our best interest to make the adversary aware of our

capabilities. And sometimes we want to disguise capabilities.

It's really interesting.

Super interesting.

OK, so remember back when we pressed pause on the skunk work story and moved up the

state of California up the coast to Silicon Valley, we'd said that when Gary

Powers and the U-2 was shut down in May 1960, that supposedly this was the end of

U.S. observational capabilities in the Soviet Union and that it was for about

three months, but nobody do it.

Well, LMSC is the reason that we got our eyes back in the sky.

And you might know that eventually after the U-2 Skunk Works would create the next

great spy plane, the SR-71, which we will get to.

But that wasn't for a little while.

So this intelligence gap was filled by this secret, not very well-known project.

I think a lot of people in the military who did know about this stuff, this is

heretical to say because it's so beloved.

But I think the Blackbird was a decoy.

We were getting everything we needed from space.

We just didn't want anybody to know about it.

And so everybody's now is like, oh, the Blackbird, it's such a shame the

government shut it down.

You know, it was never used to its potential.

Kind of never needed to be because of LMSC in space.

Whoa.

All right, I'm listening.

OK.

You got a lot of hairs on my arms.

Yeah, I know.

I'm getting mad over here.

People are probably getting very mad.

Here we go.

So when you think about America and space and the U.S.

space program, you think, of course, about NASA, Gemini and Apollo,

Mercury, Kennedy, putting a man on the moon, all that amazing stuff, which for

sure happened to end what's happening.

All of that was basic science research.

Nobody working on those programs, public observing it, like it would be crazy to

think they were going to be actual applications in space anytime soon.

There's no infrastructure.

Like these are science missions.

This is research.

And even, you know, Sputnik on the Russian side, Sputnik was a research

festival. It was like the size of, I don't know, like a bowling ball or

something. I think it was a little bigger, but like it was very, very simple.

It was a long, long, long, long time before you went from those initial

science missions to applications in space.

Or so everybody thought, because in parallel, there was a secret U.S.

space program being run by Lockheed Missiles in Space Corporation out of

Silicon Valley and in basically the same timeframe as the initial NASA missions,

the initial Mercury, I think were the first missions.

Mercury, Gemini, Apollo.

Yeah, basically concurrently with that, they got a fully operational

observational spy satellite system up into space and functioning at the same time.

How did we launch them with nobody laid out?

There was a cover story for what these things were.

I think it was called the Discoverer program.

I believe the cover story was that this was like lifeform research in space.

Like they were sending animals up to space like monkeys to prepare for manned

space plate. That was the cover story.

They may have sent some monkeys up there, but that was not the point.

The point was to get these reconnaissance satellites up to space.

So the first program was called Corona.

And you should Google about it and read.

There's a great declassification document story that the government put out in

1985 when they declassified this stuff.

And the Wikipedia page is pretty good.

Yeah, I downloaded it and I have it open my computer.

It's pretty crazy. It says secret.

It has the classification and then it struck through.

Yeah, it's literally the document that was prepared in secret and then declassified.

I think what the CIA and the National Reconnaissance Office does, I think they

write these stories, maybe quasi in real time so that there's documentation of all

this stuff and then they stamp it secret and then it never gets out until it gets

declassified. Wow, just amazing.

But on the declassification website, which we'll link to in sources,

you can see a bunch of the pictures that the Corona satellite took, including of

the Pentagon. So you can see like something, you know what it looks like and

you can see the level of fidelity that this 1959 satellite got of that.

Let's get into it. OK, so the name Corona, there are conflicting stories of whether

it comes from the Corona typewriter or the Corona type of cigar that apparently

the Pentagon official that championed this program really liked.

We'll never know. It's all classified.

So these satellites, like we've been alluding to, had cameras on them.

The first one went up in August 1960, built in the years leading up to that

by LMSC and then went up in August 1960.

While everything else happening in space was, you know, research vessels.

This first Corona satellite had a camera system on it that was able to photograph

any ground location that it passed over in its orbit around the Earth at a

resolution as low as five feet from space.

These were film systems.

Now, the U2 camera system did have a higher resolution than that higher

ground resolution, but five feet was still plenty good.

And more importantly, the Corona system could take photos anywhere

in the world on its orbit.

And if you had multiple of these satellites up there, you know, you could

pretty much blanket the Earth or at least everywhere you cared about pretty quickly

at basically any point in time.

You know, they're spinning around the Earth like, yes, you can't do it in real,

real time, but like it doesn't take that long for the thing to fly around

the Earth and then fly around again. Right.

The very first Corona mission, that very first satellite that went up in August

1960 produced greater photo coverage of the Soviet Union

than all of the previous U2 flights combined.

Five years of operating the U2 program, one satellite in one kind of month

long mission, I think it was about a month before it decayed, the orbit

decayed, got more than all of that.

Wow. No need to fly a plane.

No need to worry about getting caught.

No need to worry about the Soviets knowing what was going on.

No need to worry about being shot down.

Unbelievable.

There's a crazy stat.

Over 800,000 images would be taken by these satellites over the course

of the program, they got an enormous amount of coverage.

Now, you might be thinking as you're listening, you know, oh, I know how

satellites and satellite imagery works today.

You know, you got Google Maps, you got Starlink, you know, blah, blah, blah.

Starlink's communication, but like communication.

Yeah. How did they beam these images down from the ground?

These were not digital photography.

This was film freaking photograph.

So you got to get the film down from space is my point, which they literally did.

And how did they do it?

They dropped it.

OK, so that's the craziest thing.

They dropped from space a canister with film in it.

Mind you, they can't mess up and expose the film and ruin it.

This is very delicate film.

They drop it in a canister from orbit.

It enters the atmosphere and during all the heat and everything.

It's not like you just shove it out of the saddle.

They had retro rockets built into the film canisters to

reaccelerate out of the orbit and move it down to go into the atmosphere.

Right. Because if you just drop it out behind you, then it stays in orbit.

It needs to decelerate its rotational velocity so that it does move closer to the earth.

It is in a custom designed canister called the film bucket that General Electric designed.

It would separate and start falling to the earth

after the incredible heat and violent action of moving through the atmosphere.

The heat shield that surrounds the vehicle is jettisoned at around 60,000 feet.

So again, where the highest airplanes can start to fly and parachutes would be deployed.

So you've got this film canister.

This is my favorite part.

This is so good.

Coming down with a parachute.

The capsule is designed to be caught in midair by a passing airplane towing a claw.

The claw grabs the parachute and they use a winch to bring the film capsule into the airplane.

It's like those claw games in the arcades, you know, like, oh, you pick up the literally they

had a freaking C 130 flying around with a big ass claw to snatch this thing out of the sky.

Unbelievable.

You might say what if the C 130, which by the way, Lockheed airplane that still flies today,

the C 130 J, what if the airplane misses it?

Seems like that's a pretty reasonable probability when this thing's falling from space and you're

trying to catch it with a moving object.

It can land at sea and there's sort of a self destruct mechanism where there's a salt

plug in the base that dissolves after exactly two days, which if that happens,

then the film sinks forever to the bottom of the sea.

So if the Navy can't retrieve it within 48 hours, the salt sort of dissolves enough.

Because obviously, what would the biggest disaster be would be if somebody else or

the Russians got their hands on this and we're like, holy crap, somebody's taking photos from

space of us, right? The whole thing is genius, crazy and absolutely insane that it actually

worked. I believe it wasn't just one C 130.

I think they had a whole fleet of C 130s all flying around where they thought this

thing was going to reenter the atmosphere.

You would need to. I mean, when you have a satellite orbiting the earth that fast at,

I don't know what it is, Mach 20 something, it's pretty hard to predict exactly where

your tiny film canister is going to come back and land.

And all this happened in 1960. Oh my God.

So all told, the Corona satellite program and LMSC also designed the Agena rocket,

which was the kind of upper stage rocket booster that the Corona satellite and other satellites,

future satellites attached to.

And I think they sort of pioneer the concept of a second stage, like we need a first stage to get

us up and then we need a second stage to get us to a very particular orbit that we care a lot about

being in. So that system of the Corona and the Agena was the first spacecraft in history to do

all of the following things, achieve a circular orbit, achieve a polar orbit,

be stabilized on all three axes in orbit because you kind of needed to be stabilized if you're

going to take photos at five foot resolution of the ground, be controlled by a ground command,

return a manmade object from space, propel itself from one orbit to another.

By the way, they returned thirty nine thousand manmade objects from space.

They took two point one million feet of film of photographs in thirty nine thousand cans.

I mean, any one of those things that I just mentioned, if this weren't a top secret black

classified program for what, three and a half decades, we'd be all over the history books.

And as is like, nobody knows about this stuff.

Yeah, it's the first obviously mapping of Earth from space.

It's this first stereo optical data from space. It's the first reconnaissance program to fly

a hundred missions at all, let alone one in space. I mean, this thing operated for 12 years.

Yeah, crazy. So Corona would then lead to three follow up programs that we know of.

I'm sure many, many more. But there are three follow on ones

that LMSC did that have been declassified so far. Some of these only very recently.

So the strategy of the program evolution over time followed the four stages that we know of.

First, it was what they called see it. That was Corona just period. Can we see

the Soviet Union from space? Corona proved that the next phase was can we see it well?

And then the phase after that was can we see it all? And then the last phase, which is a lot of

the last phase is still classified is see it now. So let's talk about all of these Corona,

like we said, was just see it, get photos, but the photos were at a worse resolution than

what the U2 was able to achieve. In 1963, only three years after the first Corona satellite goes up,

LMSC and the government launch the gambit program. This is the see it well. So

gambit's max resolution still has not been declassified. We don't know how sharp it was.

This thing launched in 1963 and it is still classified how good it was,

but it has been confirmed that the resolution was under two feet, which was better than the

U2 cameras. Whoa. Less than two feet from space in 1963. Next was hexagon. Hexagon was the quote,

see it all program. Now this is starting to eclipse a little bit my technical knowledge.

And I think there's also just less known about this because a lot of this is still classified too.

I believe the hexagon satellites had longer orbit lifespans and had more film capacity before they

decayed. And so I think they were able to kind of like see more longer, I think is what hexagon was.

You basically would need larger format film with a wider angle lens. If you don't want to increase

your number of satellites. Yeah. I'm fuzziest on hexagon. Then in 1977, they launched Kennet,

K-E-N-N-E-N, which this is still like very classified. Some of it is out so we can know

a little bit about this. There actually was an incident in I think it was 2019 when Trump was

president. He tweeted a intelligence photo. That was just like this incredible photo of

you know, incredible resolution of something had happened somewhere, maybe in Iran. And he tweeted

like, Oh, see, like it isn't what you thought it like. And people went nuts. People believe it's

never been confirmed that this photo was from a future version of the Kennen program. So what

was Kennen? Kennen was see it now. It's the first real time space based surveillance system, I guess

maybe the first real time surveillance system period. I don't know. By 1977, there were enough

communication satellites up in the sky. And digital photography had come along far enough.

The Kennen satellites are like what we think about like Google Maps, like it's real time digital

photography beamed down via ground link to stations in real time. Whoa. And Lockheed has to build

their own digital workstations to like process these photos to display them to manipulate them.

Like, I think these might have been the first or like really early digital photo

processing manipulation workstations that were sold to the CIA. I didn't know about any of this.

Yeah. Lockheed built all this in Silicon Valley. Wow. By the way, you keep saying Google Maps.

There's a fun piece of trivia that I'm curious if you know. Do you know,

I think it was the code name, the original name for the Corona program. Oh, keyhole. Yes. Yes.

Which is one of the companies that Google acquired that became Google Maps. Yep. Different keyhole.

Different keyhole. But I'm pretty sure keyhole, Inc., which became Google Maps,

was named after this keyhole program. Oh, I very well could have been because it was 1995

when that was declassified and I'm sure keyhole was started after that. Yep. Just super cool.

Along the way, LMSC also does a lot of pioneering work in weather satellites and they launch

weather satellites because it turns out that most of Russia is under cloud cover most of the time.

So they got to know when, you know, the weather is going to be clear enough to look pretty awesome.

Well, that's when you get into like all the synthetic aperture radar and all the other types

of sensing that you have in satellites now that are not just the visible light spectrum in order

to get visibility of stuff on the ground, no matter the conditions. Yep. They're part of the

positioning satellites that the military puts up and that goes on to be opened up to commercial

use. And that's the GPS system that we use today. And of course, I'm sure LMSC is part of many,

many other things in space that we still have no idea about. Wow. Yeah. One thing that we have

a lot of idea about that they built that I had no idea until researching all this. So, you know,

we're now in the seventies as this is going along and we'll come back and talk a little bit about

this as we come back to skunkworks here in a sec, but we're getting towards the end of the Cold War

and this stuff is less urgent. Lockheed and LMSC start moving into non-military applications or

trying to, but LMSC gets a contract from NASA and builds the Hubble telescope. Did you know that?

I did know that. And Martin Marietta, future Martin and Lockheed Martin built the large

orange fuel tank for the space shuttle, which took the Hubble telescope to space.

That's so awesome. Different companies at the time, now the same company.

Yep. All right, listeners, our next sponsor is an old friend of the show, Modern Treasury. As you

may know, Modern Treasury is the payment operations platform for faster payments.

And this isn't the first time we've partnered with them. So we are excited to bring them back

to the show. We have become quite the payments nerds this year and have a much deeper appreciation

of just how important the modern payments industry is to the world. Money movement fuels

literally everything in modern society and modern treasury is right there at the heart of it.

Yep. And money is moving to a real time future. In today's world, consumers expect instant access

to goods and services and businesses need real time ways to track revenue, respond to customers,

etc. So with software powered business models, markets that never sleep and faster ways to pay,

it is clear that the instant economy is here to stay ahead. Businesses just need to move track

and reconcile their payments at real time and at scale. Yep. And that's where Modern Treasury

comes in a payment operations platform designed for this new era. Think of it as money movement

supercharged faster payment rails, smart workflows and real time visibility technology that modernizes

your existing financial infrastructure. With Modern Treasury, your company can move money

faster and more efficiently than ever, boosting business performance and enhancing customer

experiences. Payment operations go from manual and slow to automated and continuous from isolated to

fully connected all in real time tracking every cent. If you your company or your portfolio

companies want to transform your payment operations and join the instant economy head on over to

moderntreasury.com slash acquired or click the link in the show notes and tell them Ben and David

sent you. Okay, two other things that I want to talk about with LMSC before we come back to the

coda on skunkworks and the blackbird and all that. One, I think I alluded to this earlier.

LMSC listeners, you be the judge. The stories that we've just told, is this more impactful

to America and the world than what skunkworks was doing? Personally, I kind of think yes,

but maybe you can debate. What is undebatable is that LMSC from a business standpoint within Lockheed

became the crown jewel of the company. Which isn't true anymore, or at least it's not their

largest business today. Well, I think at times in the 60s and 70s and 80s, LMSC was the largest

business by revenue. But almost through the whole time, it was by far the most profitable division

within Lockheed. And at times when we'll get into Lockheed fell on some really hard times

in the 70s, there were years where LMSC generated more than 100% of the profits of Lockheed. So all

of the rest of Lockheed skunkworks included was in the red, unprofitable, bleeding money. And LMSC

was keeping the company afloat. Wow. And if you think about it, I guess one, like just what

they're developing and the scale of it and these contracts are huge, both under the ocean and up

in space to though what they're doing, it's different than building airplanes. And I alluded

to this when I was talking about it's a different talent set. This is much more technology problems

and computing problems that LMSC is tackling here. Yes, they're building missiles. Yes,

they're building rockets and all that. But the core value components of those rockets is

computing and silicon and ultimately software. And as we talk about all the time on this show,

like, well, that's really good margins, definitely better margins than building airplanes.

So the stats I have, this is from Beyond the Horizons, which also is where a lot of the story,

especially of Corona came from during the 12 year period from 1960 when Corona first launched

to 1972. Lockheed as a whole, did 26 billion in revenue over that 12 year period, and just 255

million in total profit, not a high margin company during that period. LMSC accounted for

over a third of that revenue and 128% of the profit. So that's what I was talking about.

Everything else in Lockheed lost money, or at least in aggregate lost money. And then during

the early post cold war period from 1983 to 1992, LMSC accounted for 46% of revenue, so

growing percentage of revenue and 72% of profits during that 10 year period.

Wow, it really is a completely different company today. And I want to save why,

as we drift toward today and analysis and all that, but that's crazy how big the LMSC business

was at the time. It was a great business, just from a business standpoint. So the other thing

I want to talk about before we come back to Skunk Works is LMSC's operating principles in

philosophy. And so much of that was built off the shoulders of Skunk Works. And a lot of the

guys in the YouTube videos that I found talk about this, their philosophy though, they codified into

seven tenets. So Kelly had his 14 rules, LMSC had seven tenets. And most of them are very similar to

Skunk Works rules. We'll link to an image of them in the show notes. One of them though,

that I want to highlight and discuss that to me stands out as different from Skunk Works,

is tenet number one. And that one is focus on a threat based need. And I think that's really

interesting, huh? To me, when I read that and thought about it, that element is missing from

Skunk Works and Kelly's philosophy. Oh, this is conjecture here. There's no Skunk Works book

about LMSC. So we have very little information to go on. But if that really was tenet number one

for the company, I think you could maybe extrapolate that a little bit to the market

context is really important for what you're doing. And don't lose sight of the market context for

what you're building. Kelly's philosophy of all that matters is rapid delivery of superior products.

Nowhere in that statement is there room for the market. Well, who decides what's superior? Maybe

a small number of people want this, but do a large number of people want this? Like how important is

this? Obviously what Skunk Works was doing was really important. Or so they thought. I mean,

if they knew about this robust spy satellite system. Well, this is the argument. Maybe it

wasn't that important. Maybe the Blackbird was a decoy. Okay, we have not talked about the SR-71.

Can you please take us back to Skunk Works? I'm like dying for my Mach 3 airplanes and ribbon

engines here. Okay, let's do it. But keep that in mind though. A threat-based need. Was there a

threat-based need for the SR-71? Maybe. My computer wallpaper needs to exist, so that's a need.

Oh, there was a market need. Was there a threat-based need? Okay, so Skunk Works. The greatest airplane

ever built. Gee, it sure would be nice if we had a plane that couldn't be shot down. So when Gary

Powers is shot down in May 1960, of course, as you would expect, the CIA and Skunk Works is already

hard at work at the successor airplane to the U-2. Everybody believes it's kind of a miracle that

they were able to fly for five years like they did. They knew that this day was coming when

the Russians would be able to shoot it down. So as we talked about, the U-2's primary defense,

as it so happened, wasn't intentional, but as it happened in practice, was how high it flew.

It was obviously trackable on radar. 70,000 feet. Yep. It's not like you could evade enemy

fighters or missiles in this thing. It had a hundred foot wingspan. It turned like a school

bus. It was how high it flew. And then all of a sudden that was no longer defensible.

So it's not very fast and it doesn't fly high enough to evade missiles. So kind of useless.

Yep. So if you remember back to the original spec for the program, there were three sort of

sectors that were possible for how you could operate a program like this. One was fly high enough.

That's what the U-2 ultimately did. There was also though, fly so that it can't be seen by radar,

stealthy. We'll come back to that in a few minutes here. And then three, make it go so fast that even

if they do fire at you, it just falls behind and then explodes miles behind your incredibly fast

airplane. Yep. So that's the path they took. If you can't evade them, outrun them. Yep. It's like

the Sonic the Hedgehog of airplanes. So this program, if you know anything about the SR-71

Blackbird, you're like, well, that's a Air Force airplane. We're talking about the CIA here.

The Blackbird was not a CIA airplane. The program that the Blackbird ultimately came out of

was the A-12 Oxcart. This was essentially the same airplane. We'll talk about the differences

in a minute. But this was the CIA contract that they had Skunk Works working on. And it was, yeah,

the goal of make this thing so fast that whether they see it or not, they're not going to shoot it

out of the sky. It has an even better camera, I think also designed by Edwin Land. And it can

get these incredible photos flying really, really fast. Yep. And to be able to avoid surface to air

missiles, that basically meant that the specs for this thing were that it had to go Mach 3 or

faster. Now, to outrun any missiles, it had to do that with a pilot. There had to be humans in this

thing. Faster than Mach 3 is faster than 2000 miles an hour. If you fire a rifle, that bullet

doesn't go Mach 3. If you're standing on the ground and you pick up a rifle and you shoot it

and an SR-71 flies over your head, the SR-71 will beat the bullet. Yeah, it goes about

two thirds of a mile every second. This thing also is not very good at turning, as you would imagine.

So there's a fun stat about the SR-71. It cannot turn around in the state of Ohio.

Its turn radius to change direction by 180 degrees is a wider turn than the state of Ohio.

Oh, wow. Its decommissioning mission, just to show off how fast it ever went,

was one hour and five minutes from LA to DC. For being placed in the National Air and Space Museum?

Yep. Coast to coast in an hour. Wow. And I remember being a kid looking at this thing,

like, well, why didn't we commercial? You can't commercialize this thing. You got to be in a

way that looks black to you, straight basically looks black to you. You can see the curvature of

the Earth. You can't navigate really by Earth-based landmarks because the Earth-based landmarks are

moving by you too fast. So the best you can do is be like, the Rockies are in front of me. Oh,

the Rockies are behind me. And that's not terribly useful. So they had to invent a new navigational

guidance system that sits on the top of the plane, R2-D2 style, looking like an astromech

from Star Wars to navigate by the stars. So great. I mean, it is like 50 concurrent

miracles that went into making this thing possible. And hopefully this is obvious,

but just to make the point again, you know, some of you might be sitting there being like,

well, you just told me about how the sister company LMSC did all this amazing stuff in space.

You go a lot faster than that to get to space and whatnot. And like,

yeah, but you don't have humans on there. So a pilot's got to fly this thing.

And these aren't rocket engines. These are jet engines that they figured out how to make

go Mach 3. Yup. Okay. So when Skunk Works and Kelly and Ben Rich and everybody sit down to

work on this, the current state of the art fastest plane at the time, this is late 1950s

when they start working on this, is the McDonnell Douglas F4 Phantom, which is able to hit just over

Mach 2 with its afterburners on. So not sustained flight. Like when you punch the afterburners,

it can barely touch Mach 2. And the F4 itself was only a bit faster than the Skunk Works built

F104 Starfighter that Ben, you mentioned earlier, which was the first collier trophy that Kelly

Johnson won. So the idea that you were going to achieve cruising speeds, like sustained

speeds above Mach 3, this is a big piece to bite off here. Only a handful of planes have

ever been able to do this since. And I'm pretty sure no other plane has been able to do this

at cruise speed without engaging afterburners. It is still to this day, unless there are classified

programs we don't know about, the highest and fastest humans have ever flown without rocket

propulsion. Yes. Okay. So how are you going to do this? The only way you can do this in a

jet powered plane is to essentially design something that can run with afterburners on

all the time. Like they're not afterburners, they're just burners. It's how the thing goes.

To do that, you A, required a tremendous amount of fuel and B, you also produce heat in doing so

that's like rocket level proportions. The skin of the airplane gets to 500 degrees Fahrenheit.

The area near the engines on the airframe itself gets almost to 1000. Yes. And the engines, I think

inside the engines get to close to 3000 degrees, I believe. So they had to build the whole plane

out of titanium to make this work. Which was a metal that no one had ever built a plane out of

before. Right. This is really funny. There wasn't enough titanium in the United States

to build all these blackbirds or raw titanium that they could easily source.

There happened to be mines somewhere else with a bunch of titanium.

So the government and Lockheed set up a bunch of dummy corporations.

In Europe, like European incorporated dummy corporations.

Yes. And they source a large amount of the titanium that goes into the blackbirds,

A12s and then the blackbirds out of the Soviet Union. Too funny.

And by the way, you can't machine titanium with regular tools. Right.

Titanium is so hard that it will damage your tools. So they had to machine new tools

for the blackbird itself out of titanium in order to manufacture the titanium plane.

I feel like it's like a diamond cutting facility or something.

Totally. And I think traditional materials like aluminum would lose its strength around 300 degrees.

So like you actually need a different material. Otherwise the whole plane would just dissolve

when it got that fast. Amazing.

So there's another funny thing here, which is metal expands when it gets hot.

And normally your airplane materials don't get that hot because you're not going that fast.

So it's fine if the metal expands a little bit, except when it's getting this hot,

the panels, the skin of the airplane is going to expand quite a bit.

So that means if they expand a lot, you have to leave a lot of room. So how do you leave room?

So what they want it to do is fit together really snug while the plane is flying,

which means the panels have to fit together kind of loose when the plane's not flying.

Ben, are you telling me that the blackbird had panel gaps?

The blackbird had panel gaps. And to add insult to injury, there are a variety of reasons they

decided not to have custom fuel tanks. They literally just made the skin of the aircraft,

the fuel tank itself. So you didn't need sort of multiple, you needed it to be light.

And you needed a lot of fuel in there.

Right. And so when it was on the ground after you fuel it up, because there's gaps in the fuel tank,

it would just leak fuel while it was sitting on the ground. So to solve this problem,

they went to Shell and had a custom fuel created for it that was not flammable on the ground. Like

you could smoke a cigarette next to it and it wouldn't burst into flames because after you

fuel this thing before it took off, it's just going to leak fuel all over the tarmac.

Oh my God. This is one of the reasons why it is maybe spoiling it a little bit, but to

flash forward, the Air Force hated operating these things. Yeah. I mean, it costs, I think,

$300 million a year just to maintain these things. These were beasts from hell in every sense of that

phrase, the good and the bad. Yep. Okay. So that's some of the materials challenges.

Another problem was on the engines. So the most advanced jet engines in the world at the time

was the Pratt and Whitney J58. And I believe actually they weren't even able to get the J58

in the first A12s and then only later in the Blackbirds. Did they put it in?

And we should tell people the Blackbird, the SR-71 was the two seater Air Force version of

the single seater A12 CIA airplane. Yep. So even the J58s couldn't produce nearly enough thrust

on their own to get to and sustain the Mach 3 plus speeds that they needed to hit spec. In fact,

at least according to Ben Rich in Skunk Works, they could only produce about 25% of the thrust

required. So Ben leads a team that engineers the spike inlet system. So if you're looking at a

Blackbird and you look at the engines, they've got these like cones in front of these spikes,

these big spikes. I mean, I'm sure everybody listening has seen a photo of Blackbird.

If you live in Seattle, go to the Museum of Flight. There's a handful of these at various

museums around the country. You owe it to yourself if you have not seen one of these

things in person. It's just one of the most amazing objects ever created ever.

But these cones, what do they do? So the engines get the thing up. And then once it's up in the

air, the cones expand and retract first suck in and then compress and then superheat massive

amounts of air that they then mix with fuel in the engines and ignite. Essentially, this is

the world's most badass supercharger ever created. These things are superchargers,

that's what they are. The spike system is a supercharger for the engines. It provides

three quarters of the thrust needed to get to Mach 3 plus and sustain it. Unbelievable.

Obviously, Dave and I are fanboying this thing. It's really easy to feel good about this airplane

because it also never carried guns. It only carried cameras.

You couldn't shoot bullets out of it because it's faster than the bullets.

Right. But they did consider, I think Kelly and the Skunk Works team were really advocating to

build a tactical aircraft that was based on this or a bomber and that never happened. So

every version of the SR-71 or their early prototypes of the Archangel or the CIA spy

plane, they're only ever badass airplanes that carry cameras.

And go really fast.

Yeah.

Yeah. So fortunately, you know, Skunk Works and the CIA had started working on the A-12

ox cart before Gary Powers was shut down. It takes, I believe, quite a while to engineer

this beast. They start test flying it in April 1962. Of course, at Area 51. Where else are they

going to do this? Once they start test flying it, that's when the Air Force finally gets interested

in the project and is like, oh, we want our version of this. And that's how the Blackbird

comes about. A fun little bit of trivia. Within the Air Force and the Pentagon,

the project originally was called the RS-71, not the SR.

And the SR-71 is strategic reconnaissance, but it ended up being backwards.

Yeah. So funny. It happened because President Lyndon Johnson actually announced the existence

of this thing in a national speech. And during the speech, he calls it the SR-71 instead of the RS.

There's some speculation that it wasn't that he messed up and made a mistake,

but that his speechwriter wanted it to be called the SR-71 and intentionally modified the speech.

Who knows? What is relevant though, post-Cold War politics become a huge thing here. So once

Johnson says this, nobody is willing to contradict the president. So Skunk Works has to go and like

redo all of their documentation for the whole damn thing. You can imagine Kelly Johnson's

reaction to this. Yeah. So the first official flight of the Blackbird happens on December 22nd,

1964. It reaches a top speed of Mach 3.4. God. The airplane wins Kelly his second collier trophy.

I mean, still to this day, people lose their minds over this thing. And it's stunning.

It, I believe, has never been shot down. There were some accidents in test piloting,

but yeah, it's never been hit by an enemy. I think it took four years to ever even be

detected by radar for the first time all the way until 1968. It has played roles in surveillance

in Vietnam, Korea, Arab-Israel conflict in the seventies, obviously the USSR.

There's stuff you can find out there on the internet. Obviously nobody really knows, but

supposedly according to internet lore, over 4,000 missiles have been shot at Blackbirds and none of

them have ever hit. It is just such an awesome badass thing to say the way that we're going to

get around getting shot down is just to be faster than the missiles and be right about that.

It's especially awesome when you know, as you know, the highest levels of the government,

it's kind of all a decoy. Anyway, you're getting what you need from other sources, man.

So this is a good time to talk about that. You keep saying that I had no idea until you brought

that up what an hour ago. I think you're right. Yeah. Well, here's one area where I'm wrong.

I do think that statement is mostly right, but you could argue with it and people do and did

in that satellites are not real time. You know when they're coming, you know when they're about

to fly over. If you need to instantly get somewhere that maybe you don't have the right

a satellite is flying over it and doing reconnaissance, they know when the satellite

is going to fly over so they could hide stuff during those times. If you need full flexibility,

you need a Blackbird. So it does have a use. It's not like it's useless, but unlike the U2,

which was everything, it's more of a niche use case here. So the Blackbird doesn't fly today.

Civilians are unaware of something that has flown faster. There's a crazy stat,

a little bit of trivia about the SR-71. And this really puts into context how early this was and

how strange it is that we've had nothing faster since the SR-71 first flight was closer to the

Wright brothers than today. Yeah. Wild, right? It's totally wild. And I mean, this whole thing

was built with slide rules. I had a very controversial tweet get a community noted

where I said that it was before the invention of the desktop calculator.

It's like mostly true. There's technicalities to it, but Kelly and team basically did this

thing independently of computers and calculators and figured out all the unbelievable aerodynamic

stuff about it. Of course, there's also, it's the first stealth airplane. I mean,

that's the other thing that we didn't talk about is the reason this thing wasn't detected on radar

for four years because they figured out how to fly and start to evade radar. Yeah. Now,

I don't know the details of stealth with the Blackbird. I imagine a big part of that was

the height was the altitude and the speed of it. It's not that I don't think it's more around the

shape because radar will just go unimpeded, you know, out into space. There's famous stories about

detecting where people's radar transmitters are by bouncing them off the moon and figuring out

the patterns of bouncing off the moon. It's more, I think that the SR-71 bottom was one of the first

airplanes with a flat bottom rather than a rounded fuselage. And so imagine I'm shooting a set of

waves at around sphere in front of me. Well, some of those waves are going to bounce back because

some of that sphere is exactly perpendicular to me broadcasting it. There's one particular point

that's exactly perpendicular and I can kind of tell the radius of the thing by how I'm detecting

waves that are bouncing back at me. But if it's all flat, there's only one very specific angle

for which I can shoot waves at it where I'm perfectly perpendicular and every other angle

that I shoot radar at it, it's going to bounce off and not come back to me as a transmitter.

You'd need transmitters coding all over the earth to figure out where all those waves are bouncing.

And so by making the bottom flat, they made it so that if it was truly flat,

then there's only one exact moment in time that a given radar transmitter is useful.

That's cool.

They also did a whole bunch of work around making the rivets exactly flush with the skin.

So it basically didn't have a whole bunch of rounded parts that could risk

bouncing radar waves back at the transmitter receiver.

Super cool. Keep in mind for a minute from now, that idea of flat surfaces and planes and radar

planes, not airplanes, planes like a flat plane and surfaces.

Okay. To close out on this amazing airplane, amazing and sad in a lot of ways.

It's hugely expensive to build these things. $33 million per plane, which was a lot back then.

I mean, planes now cost more, but a lot. And then as I said, $300 million a year

just to keep them operational and run the program, you couldn't use it as a fighter or a bomber.

It was only reconnaissance. It's not super popular with the military and the Air Force.

They kind of don't like it as an operational plane.

Right. It's a lusty airplane.

Yes. It's not a daily driver. Let's put it that way.

In 1970, the Pentagon cancels further orders and they order skunkworks to destroy all of the

things that can never be built. I assume that's so that it doesn't fall into enemy hands or

something like that.

And it's like we're serious about telling you we're done ordering these things and we don't

want political maneuvering to spin it back up. So we're going to be prohibitively expensive

for you or for anyone to ever think about starting the program back up.

Yep. The existing ones do stay in service, but obviously this is like a big blow to

skunkworks revenue. They're not producing these things anymore.

On the back of that, skunkworks has to do layoffs. The skunkworks division,

after the contract is canceled in 1972, two years later, Lockheed and skunkworks

lose the bidding for the F-16 fighter. General Dynamics wins that. Ironically,

the later Lockheed right before the merger with Lockheed Martin would acquire General

Dynamics fighter plane business. So it does come back into Lockheed.

And they call it out in their earnings like today. They're still selling F-16s today.

So here's what's interesting about this contract and Lockheed and skunkworks losing it.

This is an example, I think, to that first tenant from LMSE of threat-based need and real

need, market need. Maybe you want to adapt that to. Kelly Johnson, as amazing and a genius as he

is, is a very stubborn man. And the stated purpose, the Air Force's goals with the F-16

was to have a cheap fighter. It didn't need the best. It needed to be cheap and that they

could make a lot of these and they could use them all over the world. That's not Kelly's MO.

And so he and skunkworks bidding on this project, they kept trying to give the Air Force what they

didn't want and they lost it. Like the idea of skunkworks losing a contract. This is crazy.

And in particular, he didn't really want to play ball the way the government was trying to bid

out the contract. He looked at the requirements. He said, this is stupid. I'm going to design you

an airplane that I think meets the needs of how this will be used in the field rather than what

these technical specifications say here. And over the long run, he was right. As the program evolved,

the specs actually changed to what Kelly decided to build their prototype airplane to do. But the

prototype they produced was not in spec for the original F-16 requirements. And by this point in

time, to bring some context back of where the country was, you know, we're now basically post

Vietnam War. The Cold War is for sure still going on, but it's not the same level of urgency in

American's minds as it was back in the 50s. Not to mention, all military muscle is very unpopular

in America. And so any politicians who are seeking to sort of expand the might and budget and pro

activity of the military are facing a lot of resistance at home. And that is probably a good

thing for our society that that was happening. And at the same time, it made Kelly kind of a relic.

Yeah, totally. And this is not a challenge that LMSC, at least with the Corona project,

had to face because nobody knew about it. Right. So this is a really bad time for Lockheed. This

is the period like we were talking about at the end of the LMSC chapter where it's LMSC that keeps

the company afloat. Kelly retires. Kelly retires. Ben Rich takes over as head of Skunkworks. Skunkworks

stupidly decides to try to get back into the commercial aviation business. L-1011. They make

the L-1011, which by all accounts was a great airplane, but turns into a disaster project.

They're trying to compete with Boeing and with McDonnell Douglas here. The DC-10, I think,

was the McDonnell Douglas competitor. Lockheed partners with Rolls-Royce to make the engines

right as Rolls-Royce goes bankrupt and gets nationalized by the UK government. All told,

we won't go into the whole history here, but the L-1011 airliner project loses Lockheed two and

a half billion dollars. And as we said a few minutes ago, this is not a super profitable

company. They don't have two and a half billion dollars in other earnings just sitting around to

soak up the losses here. Yeah. At the same time, Lockheed also gets caught up in really nasty

bribery scandals around the world, but these are nasty political scandals themselves. And

basically Lockheed comes out looking at least to the American public like kind of a corrupt arms

dealer. So what happens is, you know, Lockheed and lots of people would argue that this is just the

way you needed to do business in foreign countries, our allies that Lockheed sold these weapons to

in the Netherlands, in Japan, and in Saudi Arabia. It comes to light that Lockheed employees and

contractors are paying bribes to political officials to win contracts. This actually brings

down the Japanese prime minister at the time. Whoa. This is a huge scandal in Japan on the order

of like Watergate in the US. Huge scandal. Sega actually makes an arcade game about it called

I'm sorry about the prime minister at the time. Like it's so funny. Lockheed also on the military

side, kind of the main Lockheed divisions engage with a couple helicopter projects with the military

and then the C5 galaxy transport plane. Those projects go horribly. They have huge cost overruns.

The C5 at least I think does ultimately become a good airplane, but costs way more than the

initial bidding. All of this conspires that especially post Vietnam period, the American

public starts to view Lockheed as this corrupt vampire octopus military industrial complex

squid sucking on America. Things get real bad. Lockheed's finances at the same time are so bad,

they need a bailout from the government. So the government has to guarantee a 250 million dollar

loan to Lockheed to keep them afloat, mostly because of the L-1011 disaster. It requires a

vote of Congress to do this. It almost doesn't pass. This is real bad. I didn't realize how

dark it got there. It got real, real dark. And again, it was only the profits from LMSC that

kept the company from probably going under. So, okay, we've mentioned stealth a few times here.

Back to Skunk Works. There is one more great Skunk Works airplane and it is under the

administration of Ben Rich, Kelly's successor. One last hurrah, at least for the traditional

Skunk Works organization. So there's a math paper published in a Russian journal. Around mid-1970s,

right around this time. Which I think gets published because the Russians don't really

see anything of value in there. They don't really know exactly what these particular

equations that are getting published could be applied toward. But somebody at the Skunk Works

reads the paper and says, huh, I think all the ways that we've been thinking about trying to

make an airplane stealth like the SR-71 with flattening the bottom a little bit and trying

to use particular materials and paint and stuff like that, I think it's good. But if I apply these

equations to make a stealth aircraft, then I think we can do something two orders of magnitude

better than anything we've done before. And I think we can make an airplane go from looking

smaller than it is like a bird on a radar to something like a BB on a radar. Or a ball

bearing, famously. Or a ball bearing. So that Skunk Works employee was then 36 year old Dennis

Overholzer, who was a mathematician. And he, like you said, reads this paper and brings it to Ben

Rich, who just six months earlier had taken over from Kelly as head of Skunk Works. And he's told

don't stick your neck out. No one's getting the crazy amount of rope that Kelly had. So prepare

to just be Lockheed's Yes Man. And we're going to use the Skunk Works for branding and marketing,

but we're not doing anything too nutty in your little shop over there. And even Kelly himself,

he's retired, but he stays on as an advisor. So he still has his fingers and everything.

He's so disillusioned at this point. He tells Ben Rich, he says, don't even pursue this. It's

not worth it. Missiles are where the future is. Nobody's making planes anymore. Don't invest the

money on this. And in particular, because when you apply these equations to design an aircraft,

the way you have to design it makes it incredibly not aerodynamic. If it works, it will be a thing

that is invisible on radar. But Kelly sort of looks at some of the early sketches of what you

would have to do to make this thing into an airplane and basically thinks that's not an

airplane that won't generate lift. He's such an aesthetic snob. He's like, that's not an airplane.

We can't make it. It doesn't look beautiful. And it's not just that it doesn't look beautiful. It's

that literally there's like only a hint of Bernoulli in there. The way that it's shaped

is unclear that it will generate enough lift to lift itself.

Yes, also correct. Or, well, I think the bigger problem was less about lift, although I'm sure

that was a problem, but more about could you control it? Yeah. Could you fly this thing?

So what's being proposed here is basically an enormous looking cockpit, this big globular

fuselage, and you can Google the F-117A. The name is the Nighthawk.

Stubby wings. These two little super thin tall tail fins. It looks super unstable. And the whole

thing has basically zero round surfaces on it. It's faceted. I mean, it looks like a diamond.

In fact, its code name, or I would say probably not its code name, but its nickname internally

was the Hopeless Diamond. Yes. You know what this thing looks like if you aren't already

intimately familiar with images of it? I actually think it looks really cool.

Totally. But it doesn't look like it'll fly or fly in a controllable way. It looks like

you made an airplane, like a paper airplane, and then you put a rock on top of it and you

were like trying to get that thing to fly. Totally. To me, it looks like the planes in

the first Star Fox game for the Super Nintendo, when Nintendo and other 16-bit game developers

during that generation were trying to make 3D games with 16-bit hardware, and you didn't have

enough processing power and polygonal power to make rounded shapes, so you had to have flat

surfaces. Big ass triangles. Big ass triangles. That's what this thing looks like. It literally

looks like not a Star Fox 64, a Star Fox Super Nintendo plane.

Right. So Ben Rich decides that he wants to put his career on the line.

Yeah, and take a risk and make this. So he goes to the Air Force. The Air Force says,

well, you know, on the one hand, your timing is good. We actually also think stealth technology

is worth pursuing. We have an active RFP out there. We didn't come to you guys because

Skunk Works hasn't made a fighter plane in God knows how long. You guys just had layoffs. We

don't like the Blackbird. Sorry, you guys are old news. And Ben Rich, like you said, he risked his

career six months into the job pursuing it at all. He risks it even further. He goes back to

Lockheed corporate and says, I want to pursue this and make a prototype anyway without a

research contract. We're going to fund this internally, which this is not something that

defense contractors do. No, we'll talk about this as we get into playbook. But it's not like a tech

company where you do a bunch of forward looking R&D and then amortize it over a bunch of customers

later. You go bid on a contract, you get that contract and then you build the thing. It's so

funny, you know, reading less so in the early history. But when you read about Lockheed today

and the industry today, there's all this talk of the customer, the customer, there's only one

customer, the DOD, the DOD is the customer. You know, it's like the Amazon, like, oh, the empty

seat for the customer in the room. It's not a metaphorical customer. It is a specific customer.

No, it's like, what does the Pentagon think? Which is a good and a bad. They're unbelievably

customer focused. Lockheed Martin doesn't build stuff unless the US government says,

I'll order it, which means they don't have to take a lot of risk. But on the other hand,

they also don't get the upside from taking risk typically.

And this is how crazy this situation is. It is literally the opposite of what you just said.

This is Ben Rich's neck on the line. This is skunk works on the line. This is everything.

So they go and they build a prototype. It's nicknamed the hopeless diamond. The codename

is have blue H-A-V-E-B-L-U-E. And I mentioned ball bearings earlier. They make a model of this

thing, a wooden model. They put it up on a pole. They tested in a radar range alongside the other

prototypes from other contractors for a stealth fighter that the Pentagon has put out. And this

thing is invisible. The way that the Air Force inspectors come up with testing it is they get a

set of ball bearings of increasingly smaller diameters and they attach them to the nose cone

of the wooden model at the radar range. And they see if you can detect the ball bearing or if it's

blacked out by like this massive plane model behind it. And they can detect a ball bearing

down to a diameter of an eighth of an inch. So the radar signature of this plane is less than an

inch. It's all flat surfaces. So it basically bounces the radar everywhere except for the

transmitter receiver that is actually shooting the radar waves at it. So will it fly and can you

control it are still open questions. But we now know that it is like, oh my God, radar invisible.

Yeah. So out of that, the dark horse skunk works wins the contract to build the Air Force's stealth

fighter. They do. They solve the challenges you just mentioned and they solve them with computers

for the first time, or at least that we know of really the first time in skunk works history.

The way you control this thing is with fly by wire, which I'd heard that term before, but fly

by wire means that the plane's systems are controlled by a computer. And when you move the

controls as a pilot, you are not directly moving the mechanics. The computer decides how to

translate your intentions into stabilized movements for the plane. Power steering.

Exactly. Well, it's even more than it's like doing all sorts of stuff that you have no idea

to make it do what you want to do. Right. I mean, it's a Tesla, basically. It's abstracting away

your inputs and doing the thing that is optimal based on what it's pretty sure your inputs want

it to do. Yeah. So they win the contract. They start testing this thing at, of course,

area 51 and the self fighter really looks like an alien spaceship.

I don't blame all these people with the binoculars who are pretty sure there's aliens.

I don't blame them either. The Air Force starts taking delivery in 1983 of the stealth fighter

from skunk works. They ultimately buy 59 of them of the F one 17 a night Hawks at $43 million each.

So that is two and a half billion dollars in revenue for a Lockheed, a time when they

desperately needed it and skunk works desperately needed it. Huge win for Ben Rich. Huge win. The

real combat debut for the night Hawk is during the Gulf War during Operation Desert Storm.

So that's what six years that they keep it undeployed or they have it, but the U.S.

government has decided that we want to save it. Well, where are they going to use it? We're not

really fighting any wars. And this is a fighter. This isn't a reconnaissance plane. This is a

fighter slash tactical strike plane. Which against gun quirks hasn't built one of those since,

I guess, what the 104 star fighter? I think that's right. I mean, yeah, the F in F one 17 is fighter.

The SR 71 was not an F plane. So the plane is never really tested in combat of what it can do

until Operation Desert Storm. And I remember watching this live when this happened. I don't

know if you remember this Ben, but I vividly remember when this happened. The first night

of the war, Operation Desert Storm. I mean, this is broadcast live to the world. The U.S. Air Force

completely knocks out all of Baghdad's defenses and infrastructure. And the way they do it is with

the night Hawks. They came in under the dark of night. No one knew they were coming. They hit a

bunch of the high value targets. And then these wars now tend to be these overwhelming force at

the start and then long, long drawn out battles after that. But this set the stage for what the

modern military engagement looks like. Yeah. So a few quotes here that are in skunk works. First from

the secretary of the air force at the time, we learned that night, the first night of the Gulf

War. And for many nights after that, that stealth combined with precision weapons constituted a

quantum advance in air warfare. Ever since World War II, when radar systems first came into play,

air warfare planners thought that surprise attacks were rendered null and void and thought

in terms of large armadas to overwhelm the enemy and get a few attack aircraft through to do damage.

Now we again think it's small numbers and in staging surprise surgically precise raids. And

then another quote here from one of the pilots that flew that night to put it in domestic terms.

If Baghdad had been Washington that first night, we knocked out their White House,

their Capitol building, their Pentagon, their CIA, their FBI, and took out their telephone

and telegraph facilities. We damaged Andrews Air Force Base, Langley, and Baling. And we punched

big holes in all the key Potomac River bridges. And that was just the first night. So this thing

is deadly. The Nighthawk very much worked. The Nighthawk flew 1% of the air missions in Desert

Storm, but accounted for 40% of all damaged targets. And so while this plane was a massive

success for what it was intended to do, this is where I sort of want to stop glorifying some of

the military might the way that we did in the Cold War, which was like, obviously for deterrent.

This is when the foreign policy sort of changes a little bit in a way where you're...

Yeah, people are dying here. Yeah.

This is the incredible paradox of this. The most overwhelming and terrifying weaponry

ever created and weapons capabilities ever created

was never used and was created so that it would never be used.

Right. It's fascinating.

Yeah, totally. But here, this stuff is used and a lot of people died.

For the F-117A, 10,000 people worked on this airplane, the Nighthawk,

and kept the secret for 21 years until it was declassified.

Wow. Crazy.

Yeah.

Let's just divorce any value judgments here for the moment. In terms of the airplane itself

and Lockheed and Skunk Works and the company, while Desert Storm was, on the one hand,

this great success story for the airplane, there's also kind of the end. That's the end of the Cold

War. There is no doubt after Desert Storm and all the other things that happened and the following

of the Berlin Wall by the early to mid-90s, it's done. And this success of the Nighthawk and success

of the US military from a military standpoint during the Gulf War, that sets the conditions

to bring us to the modern era and Lockheed today, which is not Lockheed, but Lockheed Martin.

And Boeing today, which is not Boeing, but Boeing and McDonnell Douglas,

and this incredible era of consolidation.

Right. And Northrop, which is not Northrop, but Northrop Grumman,

and which very closely almost was part of Lockheed Martin, but got blocked by the DOJ.

Yeah. And then you have Raytheon and General Dynamics,

which have eaten their fair share of all the other competitors too.

So the Gulf conflict, I think, ends in 91, I believe. And it becomes really obvious that

the Cold War era of arms buildup in the US is over and defense budgets are going to shrink

massively. And we need to start nuclear disarmament. We need to start destroying

a lot of the nuclear warheads that we build. Right. And everybody in the industry knows it.

And then it becomes super explicit. This is kind of an amazing event that happens.

In July of 1993, the then deputy defense secretary, William Perry, calls the CEOs

of all the major prime defense contractors to a dinner in Washington, at which he explicitly

tells them defense spending is going to shrink massively. You know that. And he instructs the

CEOs present that you all need to consolidate and start merging with one another. We, the defense

department, are no longer going to be able to feed all of the metaphorical mouths at this table.

And the CEO of then Martin Marietta, soon to be Lockheed Martin, refers to this dinner tongue in

cheek as the last supper. And indeed it was. This is an amazing event. Literally a government

agency just told an industry what to do. This doesn't happen in America.

Very explicitly. And this was rumored for a long time. People were like, wait,

did this really happen? The U.S. government instructed these big companies to become

anti-competitive to all merge together. And this 1993 thing really kicks off an era of

intentional government policy around combining companies.

Which is very odd, American industry. And I think as we saw during the Cold War era,

America functions on competition and thrives in competition. And here the government is saying

less competition. And in part, they're basically saying, look, it's an acknowledgement that

a lot of the times companies thrive because they're in growing markets and this is now a

shrinking market. And so what do you do if you want to maintain America's military industrial

base, but you know for a fact the market is shrinking this year and likely every year for

the next decade or two. What do you actually do? And so I think the intent here is to say

we don't want to lose capability. We want the U.S. to remain a country that has a whole bunch of

people that know how to build this stuff. So if we need it, it's there. But you're going to put

each other out of business because we just won't have enough for you. So you need to merge and get

more efficient so we don't lose the muscle. But you know, you all have real businesses,

real going concerns and this whole like so you don't lose the muscle thing that is unique on

this episode versus any other episode because the government is an indifferent player in almost

every episode of every company that we talk about. But in this one, they're an extremely

interested party where it is in the national interest. They are the customer. Right. It is

in the national interest for us to maintain this capability or so that's the sort of policy.

Yeah. So this sets off an amazing series of events kind of similar to harkening back to

the LVMH episode when Louis Vuitton and what Hennessey merged not because they liked each

other or because there was a business reason they merged for like practicalities and to avoid

dying and getting taken over by hostile raiders. In 1993, Lockheed buys General Dynamics fighter

jet business that we already talked about the F-16 business. And then in 1994, the big shoe drops,

they announce a quote merger of equals with Martin Marietta that goes through in 1995.

Except they didn't merge everything about there's two spin outs of the Lockheed Martin

combination. One is there's another set of things that Martin Marietta does

around minerals and mining. And so there's literally a Martin Marietta company that's

publicly traded today that still exists that's around mining raw materials.

Do you know this because you looked up the mine safety disclosures?

I was disappointed to see that there were no mine safety disclosures in Lockheed Martin's

financials. There's another thing that spins out called L3 communications, which is the set of

things that won't be combining into Lockheed Martin. And this has actually become a fairly

formidable competitor today. There's the five big primes, Lockheed Martin, Boeing,

Raytheon, Northrop Grumman, and General Dynamics. And L3 is kind of growing, which is fairly

unprecedented in this era of primes. But you might be saying, what is the L3? Well, there

were three L's involved in creating this company. One of them was the investment bank that helped

combine them Lehman Brothers. Yes. Frank Lanza, Robert Lapenta, and Lehman Brothers are the L's.

So the assets that do merge of Lockheed and Martin in January 1996, shortly after the big merger

goes through, they then acquire the defense business from Loral for almost $10 billion.

And then as we said a minute ago, in July 1997, they attempt to merge with Northrop Grumman.

Right. This is like Lockheed Martin sort of like looks at the DOD and they're like,

are we supposed to keep going? Yeah. Like you told us to do this, right? Yeah.

They misread the tea leaves on that one. That merger gets announced,

everybody signed off the DOJ blocks it, I assume with tacit approval from the DOD on that.

Yeah. I mean, the thing with the five big primes is they're all like very good at a certain bucket

of things. And so if you start combining Lockheed and Northrop, which are the two that really kind

of like bid against each other at this point in history, I mean, like the B2 bomber and the B21,

there's often this face off between Northrop and Lockheed. If you combine them, then you actually

do away with all competition. Yeah. Would have been so fitting, right? Given that Northrop

was a co-founder of Lockheed, but all the way back to the beginning of the episode.

So the DOJ blocks that, but also in 1997 Boeing merges with McDonald Douglas and becomes

the giant that it is now. Do you know why that happened? Oh, I do not. So we're going to talk

here in a second about the F-22 program and the F-35 program. We'll skip over the F-22 for the

moment just to hit this point. For the JSF, the Joint Strike Fighter F-35 program, this is going

to be like the biggest ever military contract. And so it's really worth going for. And there's

three companies that are worth gunning for in the mid nineties. There's Lockheed Martin right

after their combination. There's Boeing and there's still independent McDonald Douglas.

And McDonald Douglas is eliminated from competition. So it just comes down to Boeing

and Lockheed as the two finalists within a month, Boeing announces that it's buying

McDonald Douglas. Yeah. That was probably the end of McDonald Douglas once they got eliminated.

Exactly. This contract is so big and they were betting so heavily on it

that basically Boeing and McDonald Douglas after McDonald Douglas loses kind of need to just

combine and size up in order to be a formidable competitor to Lockheed Martin going forward.

Do you know the size of the F-35 Joint Strike Fighter program? Like in terms of dollars?

I do. It is a $30 billion DOD contract for 398 airplanes just for the US. We'll talk about that

but it was a prize worth going for. So yeah, if you lose this contract,

this is literally life or death, whether you get this or not. Right. So losing this

creates some extreme combination. And obviously this sets the stage. I'm going to hand it over

to you in a minute to lead the discussion of all the dynamics around this and the military

industrial complex and defense contractors today. But to set the stage, I have a few quotes from

Norm Augustine, who was CEO of Martin Marietta, where the merger happens. And Dan Tellup,

the CEO of Lockheed is the first CEO of the combined company. Dan came up through LMSC,

started there, worked in LMSC for decades and then became the CEO of Lockheed. He's the first

CEO of the combined company. And then Norm takes over for a few years after that. In 1997,

Norm is a character. He's a serious character. He writes a Harvard Business Review article.

I want to read a few quotes from this. Following the Last Supper, which he termed it the Last

Supper, it became evident that there were only two potential survival strategies. One was to move

into new markets. He's meeting commercial markets, a difficult and time consuming option that has

rarely succeeded. And as we talked about, definitely Lockheed tried that in the 70s and

failed miserably with the L-1011. The other strategy entailed something almost as difficult,

increasing market share in existing markets during a period of severely declining businesses.

Duh, this is what we're talking about. And he says, here's what happened. He just lays it all out

here. Lockheed soon purchased General Dynamics Aircraft Business and Martin Marietta purchased

General Electric's Aerospace Business. All told, our company comprises 17 previously

independent entities, like independent until recent times as he's writing this. General Dynamics,

Sanders, Gold Ocean Systems, GE Aerospace, RCA Aerospace, Xerox Electro-Optical Systems,

Goodgear Aerospace, Fairchild-Weston, Honeywell Electro-Optics, Ford Aerospace,

LibraScope, IBM Federal Systems, Unisys Defense, Lockheed, Martin Marietta, and Loral.

What a Franken-company. As we've been alluding to, these were not very profitable entities.

So Lockheed at the time of the merger did 13 billion in revenue and only 422 million in net

income. Martin Marietta was slightly more profitable, did 9.4 billion in revenue,

and 450 million in net income. So both of these are like 10% or less net income margins.

Yeah. And you basically have a situation where all these contracts kind of go to all of the

contractors. They just rotate around who's the prime on it. And the prime makes the most money

and then it has the most sort of sway and you don't want to be with a subcontractor,

you'd rather be the prime contractor. But still, this current military industrial complex is very,

all five players are basically in on all the big contracts and the government's very aware of that

and the companies are all very aware of that and it sort of reached this stasis.

Yeah. So Ben Rich basically called it in 1992 when he was talking about this at the end of the

Skunk Works book, about the end of the B-2 bomber program, which by the way, the B-2

was kind of a make good when they gave that to Northrop Grumman.

This is the stealth bomber.

Yeah. By all means, that should have gone to Lockheed Martin. They had the expertise from the

F-117A, Nighthawk, and I mean, this is the Lockheed side of the story, but they beat the B-2

in a lot of the early competitions. But the government still gave the award to

Northrop Grumman because there was some particular plane that the government said Northrop could

manufacture a bunch of and then sell internationally and then change their mind.

And so then Northrop was sort of left holding the bag. And so it was the Department of Defense

being like, all right, you can win this competition. And who knows if any of these things are true,

that's Lockheed side of the story. But anyway, Ben writes, under the current manufacturing

arrangements for the B-2, Boeing makes the wings, Northrop makes the cockpit,

LTV makes the bomb bays, and the back end of the B-2 airplane, in addition to 4,000 subcontractors

working on bits and pieces of everything else. Because of the tremendous costs involved,

this is probably a blueprint for how big expensive airplanes will be built in the future. For better

or for worse, this piecemeal manufacturing approach, rather than the skunkworks way,

will characterize large aerospace projects from now on. With many fewer projects, the government

will have to spread the workaround across an even broader horizon. What will happen to the

efficiency, the quality, and the decision making? At a time of maximum belt tightening in aerospace,

those are not just words, but may well represent the keys to a company's ability to survive.

Yep. So I think that sort of 1992 Ben Rich publishing the skunkworks book,

then the Last Supper, it basically marks the end of skunkworks. Skunkworks is still a term that is

used to describe a part of Lockheed Martin, but is it the skunkworks of the 50s, 60s, 70s? No,

not at all. It's a completely different thing. And airplanes are just not built by small teams

in this sort of auteur way, the way that they were in Kelly's era.

So let's talk about some of these huge programs, these large fleets of planes that the US

government has bought in recent years. And we'll start with the F-22. And this gives you a sense

of how freaking long these timeframes take. So in 1981, the Air Force identified a requirement for

an advanced tactical fighter to replace the F-15 Eagle and the F-16 Fighting Falcon. So that sort

of kicks off this we're going to need some future thing. In 1985, the initial order, and I don't

know if it's technically an order or how it sort of changes over time, but the initial

pseudo commitment is for the US government to buy 750 planes of what becomes the F-22 Raptor

for $44 billion in the total program cost. Wow. That gets revised down. Again, an airplane has

not flown yet. Just before 1997 to 339 planes, that's going from 750 to 339 for $62 billion

in total program cost. That cost went up, even though the number of planes dramatically went

down to like half. I was wondering, I was like, did that misspeak there?

Nope. Then the F-22 program is over. It was a big thing in the Obama administration where he

basically said, I'm going to veto anything that comes to my desk for any more Raptors. We're

done with this, but it's not as good as it sounds. No, it's not as noble. The final down from 750 to

339 is 187 planes delivered. They kept the $62 billion total program cost fixed. They managed

to do that. So each plane ends up costing $360 million if you amortize all the R&D

against the very few airplanes that they ended up making. The F-22, much like the SR-71,

there's not much we can complain about with the plane. It is a bad ass plane. In fact,

for Seafair here in Seattle, the last few years they've had an F-22, it is an unbelievable thing

to see live. It performs maneuvers that just look alien. I mean, you just don't understand how

the physics makes it work. It was all about air superiority. It was all about speed. They took

all of the stealth lessons from the F-117 and put it into a very fast air dominating airplane.

So the stealth fighter, the Nighthawk, was angular and looked like a Super Nintendo

Star Fox plane because the computational ability to model it at the time, it wasn't that you needed

to have just flat surfaces. It's that you could have three dimensional rounded looking surfaces.

You just needed to be able to model it for the radar signature and computers weren't advanced

enough at the time to be able to build a 3D modeled version of a radar stealth structure.

As they advanced, you are now able to do that in much the same way that in video games,

you can now build lifelike looking 3D models out of the same polygons before. And so the Sega,

I think it was the Model 3 arcade board that we talked about that was part of the real 3D

revolution in video games. They used it in the arcade cabinets, right? The cutting edge,

better than home consoles, computers, Virtua Racer, Virtua Cop, Virtua Fighter being the big

one where on that Sega co-developed those boards with Lockheed Martin in order to model the stealth

airplanes. Yes. Unbelievable. That is insane. So fun. So what we can see here is sort of the

classic modern, boondoggle is probably the wrong word, but program gone awry, where there's a

sensible total program cost for making a lot of airplanes. And then as there's more pressure on

the budget over time and there's cutbacks that happen, you end up making less and less airplanes.

And so it's really hard to amortize all the R&D costs. And because of the way that these contracts

work, it's not the tech company that's left holding the bag. It's not the contractor holding the bag.

It's total cost plus model. The company, the contractor, Lockheed, doesn't take any risk.

And so who's holding the bag? The government's just paying more for each airplane rather than,

you know, you could imagine if I was Apple and I sunk a billion dollars into developing the next

great device and then no one bought them, I'm out a billion. But in this scenario, the government's

like, look, I told you I'd pay that much. I'm paying that much. And unfortunately, I just

can't spread the R&D across as many units. Wow. It's the R&D, but also the tooling,

like we were talking about with the Blackbird. Totally. The infrastructure that you need to

spin up to make a new airplane is a lot. Right. Following Ben Rich's sort of,

hey, I think this is how airplanes are going to be made in the future. This happens in 46 states.

The F-22 is built in 46 states. Yes. And it requires 95,000 jobs, which in some ways is good.

It's good to employ people. In other ways, the reason that some of these projects get funded

is because it creates these jobs. And the reason that it's in 46 states is because that way,

basically every member of Congress is incented to vote for it. You're talking about pork barrel

politics. Exactly. So I think Lockheed has become world-class at understanding where their bread is

buttered. Yes, their customer is the US government, but the people approving their

funding are individual people, these members of Congress who all want to get reelected.

And so Lockheed spreads all these operations around. They employ all these people. And members

of Congress love nothing more than creating jobs for their constituents. And they hate nothing more

than participating in a vote that eliminates jobs. And so Congress can kind of be simplified to 538

principle agent problems. And contrast that with the team of 50 engineers and 100 machinists that

built the U-2. Yeah, of course the F-22 is a much more advanced airplane than the U-2. But the size

of the engineering challenge relative to state-of-the-art technology was way less than the size

of the U-2 engineering challenge relative to state-of-the-art technology. Yep. So then there's

the next program that comes along, the F-35 Lightning II, the Joint Strike Fighter. And so

the mindset here is, well, we finally get it. We need to make a lot of these things if we're

going to make a big investment. The government sort of pulls its resources and the DOD sort of

works across the armed services and they reach out to all of our allies, Britain and others,

and they say, what's like a common platform that we can develop so that we can get the

best economies of scale out of this thing? That's the right thing for the American taxpayer.

And so they come up with this idea for the F-35 Lightning II and they're going to make three

models and each of the models are for a different purpose. It's this incredible piece of technology.

One of the three models can actually angle its engine down and take off vertically using its

engine to reposition. I don't think they can use this in combat, but they can use it to move

itself around on an aircraft carrier and stuff like that. It's pretty incredible to watch videos

of it if you just go search on YouTube. It interestingly has a different aim and mentality

than the F-22. It's less about being sort of the fastest plane in the skies and much more about

having the technology and the visibility to have the best information at all times. It's sort of

looking to the future of information-based warfare more than pure air superiority and speed.

It's not all the way to like a drone future or a cyber security future, but you can see it drifting

there. Really intense communications between a whole squadron of fighters, intense heads-up

displays with digital stuff for the pilots in the cockpits and in their helmets. And so it's sort

of like the most technology-forward plane program ever. So when I say big, I mean really big in terms

of the number of orders that are going to be placed. The initial order book is approximately

3,000 airplanes worth a potential $200 billion for the total program cost.

Wow. In practice, it's kind of as pork barely as the F-22. Lockheed won the contract,

but it's subcontracted. It's peanut buttered out to all the other big programs too. The

rear fuselage. These pieces are shipped all over the globe before final assembly. So we've sort

of expanded it even from pork barrel in the U.S. to like which of our allies can participate in

making this thing and thus benefiting in their area too. So here's some of the stats from Lockheed's

2022 annual report. The USA's F-35 order is a $30 billion order just from the U.S., $30 billion.

That's 398 airplanes. That is $750 million per airplane. The Swiss have placed an order for

$6 billion for 36 airplanes. Finland bought 64. Germany 35. Greece 20. The Czech 24.

Canada 88. Poland 32. Lockheed Martin. This is an enormous win to win this program. And it is

among us and our allies the largest ever purchase anyone has ever made for any piece of defense

equipment. It's just so clear listening to you talk about that and contrasting it with everything we

talked about in the story portion of the episode. This is a different world than the Lockheed of

World War II and the Cold War and the military of World War II and the Cold War. Like it's very

unclear to me what the threat based need is here for this. Well yeah hopefully deterrence.

Well I guess I don't know I'm not a military strategist but you know you mentioned drones.

Drones are a thing now and they're a lot cheaper. Yeah put a pin in that for the moment. I'll finish

rounding out the national defense budget just to put all this in context of what Lockheed sort of

represents here. So our national defense budget in the United States is 800 billion dollars.

As you would expect that's more than any other country in the world. It's three to four percent

of our GDP we spend on defense. Interestingly it is down on a percentage basis of when you think

about like the percent of federal revenue spent on defense it's actually down. Back in the 60s we

between 12 and 20 percent. So I think that's a little bit of a counter narrative to people that

like to complain about how much money we spend on the military. Well I guess it is you know to the

point of consolidation in the last supper the government was clear we're going to spend a lot

less we're just going to spend it in a much more concentrated fashion. Exactly the military

industrial congressional complex has really it's almost like what's happened in the banking system

we like pseudo nationalize a few companies there's these too big to fail entities that are like in

cooperation with the government neither can really exist without each other and we just are okay with

that we say okay that's how the system works and for better or for worse private industry and the

government are tied at the hip there. So a few more stats on this so that I said in recent years the

government's DoD or defense spending is between 12 and 20 percent. The total U.S. government budget

is six trillion dollars so defense in there at 800 billion clocks in it's actually lower than

social security health care and income security. Wait a minute you said it was three to four percent

it's three to four percent of GDP ah but it's 12 to 20 percent of the federal budget. So okay we

know that of the six trillion dollar budget defense is less than social security health care

and income security. It is more than Medicare education or transportation just so people sort

of know where it kind of sits there. So of that 800 billion dollars about half of the defense

budget is spent on contractors like Lockheed Martin and of that 400 that's been on contractors

50 billion goes to Lockheed. They are the single largest recipient of federal spending as a

contractor full stop. Wow not even just defense across all companies across all companies. Wow

I knew they were the largest defense contractor but I didn't realize they were the largest

government contractor period. Yep Lockheed then Boeing then General Dynamics then Raytheon

then Northrop then McKesson. Wow you get to five before you even get to a health care.

Wow. So you've got that 50 billion that goes to Lockheed Martin from the federal government.

How much of their total revenue do you think that is? Oh it's got to be like 90 percent.

It's close it tends to hover around 75 percent so uh 66 billion dollars was Lockheed's total

revenue last year of which 50 billion came from the U.S. federal government. Makes sense and I

get the rest I would assume would come from foreign governments. Correct yeah our allies

because the U.S. government basically has a rover on anything and can put the kibosh on

Lockheed exporting to anyone. It's not terribly profitable their net income margin is eight percent

as we've been sort of talking about the whole time you can sort of like see the cost plus pricing

right there at the bottom line of the company Lockheed Martin makes a bunch of money and at the

end they only have eight percent and that's basically contractually figured out. I think

whenever one of these contracts gets bit out the big defense contractor says I'm going to slap

eight nine ten eleven percent on top of it and that's going to be the cost and that is exactly

why their financial statements look the way they do is because that's exactly how the government

decides to fund it. Which we should probably talk a little bit about the rationale for that. I'm no

expert in this and we should probably have an economist on acq2 at some point in time to talk

about it but my understanding is that while Warren Buffett and Charlie Muncker heat cost

plus contracts and in general they set up terrible incentives they are useful in cases where you

don't know what the cost is going to be but it's a incredibly important investment to make and

traditionally that has been defense expenditures. Yeah like we need the U2 we don't know what the

cost is going to be but we need it to happen. We need the corona program we don't know what the

cost is going to be but we need it to happen and I think that is the rationale of how we got here.

But it doesn't make sense when the government's buying more modern things like we're buying

software as a service. Let's say I'm making slack and I'm selling that to the government

if the contract to procure something that looks like slack requires me to bid on it in a certain

way and I'm using slack there's lots of defense software you could sort of think about here

Palantir for example how do you let the government put out a contract to bid on that structured a

certain way when the way that you've decided to structure your company where you do R&D upfront

you're willing to take on some of the risk and then you want to sell something and amortize your

R&D across all of your customers the way that every tech company does and the way that you

sort of get operating leverage on your company that doesn't fit in these gigantic cost plus

contracts. In fact what it ensures is you cannot get operating leverage on your company no matter

how large you scale you will never have big fat gross margins that outrun your fixed costs.

It's like the opposite of what every tech company is trying to do.

Right this is sort of the great irony in the government together with Lockheed really seated

Silicon Valley. The modern Silicon Valley and the modern defense industry are in many ways

kind of incompatible from a business model perspective.

Yeah someone told us as we were preparing and researching this episode that Palantir figured

out that what they had to do was sell laptops to the government that came preloaded with their

software so they could sell a physical thing that had a cost of goods sold associated with it such

that it could be bought in a cost plus way. And now I think this is probably changing and

certainly there are smart people in the government that recognize this and their

pilot programs to be able to buy software and technology. But if you look at some of the most

successful Silicon Valley style startups that are selling defense to the government you know whether

it's SpaceX or Andruil or others yeah they're selling hardware they're not selling software

solutions. Yeah I'd say we're in the first out of the first inning in trying to figure out how to

sell software to the Department of Defense. Which is sort of scary when you think about it because

like I suspect you know most acquired fans will not find this a controversial statement but

I think it's quite likely that modern warfare is going to occur more in software than in

hardware just like the Cold War occurred more in capabilities than actual fighting.

Yeah and it's probably fair to say I didn't talk to anyone at Lockheed I'm not judging anyone who

works at Lockheed but I think the reputation in the industry is if you're a fantastic software

engineer you're probably going to go to a more interesting modern company and that's why you see

the Andurils of the world and the Palantirs of the world kind of sucking up top talent that has this

as a thing that they're really passionate about working on. Yeah there's also a huge difference

now versus certainly World War II but also the Cold War the motivation of people who are going

to work at Skunk Works they were doing it out of patriotism for their country like the clear and

present threat of the Cold War was an extremely motivating factor. That's not there in the same

way today. Very different time we live in. Very very different time. Or at least there's a

perception that it's a very different time that we live in. I don't really know for sure if it is or

not. Well which is so funny about this whole thing the Cold War and now perception is reality.

Nobody really knew then and nobody really knows now what the reality of the threat is but the

perception is what drives people's behavior and that's what drives the economy. It is in the

government's interest for everyone to feel safe and secure and so you can sort of rise above

Maslow's hierarchy and do other stuff with your life and like create innovate and live happy

prosperous enjoyable lives and go to work and do things that aren't for defense and drive the

economy forward. It is also in the interest of the country to make everyone a little bit aware

of how we have this incredible quality of life in the US and I don't think we're indexed in that

direction even one percent. I think as you talk to people there's a lot of reasonably oblivious

but well-intentioned people who are like not willing to give the credence to America's

incredible military of why we get to enjoy such charmed lives in this country and a lot of people

that want to like go la da da da we live in this amazing globalized wonderful world where no one

needs to think about the military at all and you're like do you live on this planet I love peace as

much as anyone and that should be the goal and also the default state of humans. Technology

changes human nature doesn't. Right unfortunately there's some set of people who want to like come

and take your stuff and in the same way that price is set in a market by the person who is

willing to pay the most the need for security in the world is set by the person who's most willing

to come take your stuff and that's how much defense you need to have in order to stop them

from coming and taking your stuff and hopefully you don't need to get into armed conflict over it

but I do generally feel that there is a disconnect between people who enjoy the way of life that we

have but are unwilling to acknowledge why we have it and I think that is extremely different today

than it was 60 years ago. Yes I totally agree with everything you're saying I also think there's

another layer to this which is really a huge theme of this journey with the research and doing this

episode for me with Lockheed and that is the phenomenon of competition and its impact on human

behavior probably for both the Soviet Union and the US although I'm less equipped to talk about

the Soviet Union the fact of that competition led to tremendous advances for society I mean all the

things we just talked about Silicon Valley itself for god's sakes wouldn't have existed without this

so there is sort of a rational argument for having an adversary technology and society

was pushed forward in America by the Cold War and by Lockheed as part of that. Yeah well we've

already done a bunch of playbook stuff so before we get into that formally codified analysis section

let's just talk about real quick the segments of Lockheed Martin today so people understand like

what do they actually do today because we've talked about a lot of this stuff there's aeronautics

which in theory contains skunk works so that's F-35s F-22s the old F-16s the C-130J Hercules

airlifter the F-35 I believe is the largest program generating 20 percent of all net sales

across all segments well like you said it is enormous right it's 66 percent of 2022's revenue

in that aeronautics division so like aeronautics equals F-35 there's also missiles and fire control

then there's three rotary and mission systems which contains helicopters and they bought

Sikorsky so it contains Sikorsky the other helicopter company and then four is space

which includes the Orion capsule that's evolved over the decades and it's now part of NASA's

Artemis moon program it also includes ULA which is the joint venture that we didn't talk about

with Boeing that was sort of forced upon both Boeing and Lockheed Martin where they both

independently were developing launch capabilities for the U.S. government this is especially pre

SpaceX or before SpaceX was as powerful as it is today the U.S. needed to contract launch services

from someone and so Lockheed and Boeing were both developing them that didn't go terribly

well and they ended up asking for bailouts from the government and the government said

can you two combine and Lockheed Martin and Boeing came back and said are you

kidding me with that guy no these companies hate each other and so but they agreed to do

it because they kind of had to and so ULA is sort of this shotgun wedding between the two companies

which as we talked about on the SpaceX episode really opened the door for SpaceX to come in and

compete totally and the reason they didn't go well was because in sort of the pre SpaceX era there

were all these companies that wanted to put stuff in space that all ended up going out of business

you think like Teledesic, Iridium, a lot of bankruptcies and so Boeing had tooled up this

huge factory Lockheed had done this too and so they were left holding the bag and it got really

ugly Boeing was caught trying to steal proprietary data from Lockheed Martin ultimately this JV has

gone well ULA is going to 2x their capacity to 25 launches a year which is way more than they used

to do but still way less than SpaceX over the next five years or so with this Vulcan rocket

still more expensive than SpaceX but you know they started from big incumbents rather than

starting from a startup so it's just sort of a different disposition joint ventures are not

permanent things and these companies kind of can't continue to be in business together

so ULA is up for sale and it'll be very interesting to see if one company or the other

ends up buying it but it is an important part of NASA's Artemis program and others moving forward

it's also important to Amazon a whole bunch of the Kuiper launches are happening on ULA

oh interesting is that because Bezos doesn't want to launch on SpaceX

neither company will really like say anything about that

there's got to be something in there uh billionaire competition yes so those are

the four segments much like our Sony episode and I'm pulling forward a playbook thing here

this is a pretty well diversified conglomerate I mean fighter jets are their bread and butter at

40 percent of overall revenue but missiles and space are each 17 percent and rotary mission

systems are 26 percent and all of them are 9 to 14 margins so they all are double digit

percentage of revenue and double digit percentage of profit so congratulations we've got a

conglomerate all right well let's head into our analysis section and this will be to kind of pull

together a lot of the strings that we've mentioned on this episode but codify like what are the real

takeaways and like let's understand this business and this institution and what it is in our world

today to kind of tie together some of the things we've teased at over the course of history here

and again few caveats one we know we did not tell the entire Lockheed Martin story nor could we

two this is not a political or defense podcast you can tell that I'm a conflicted person on this

let's start our analysis section with power so what we do in this section is we analyze

what it is about a business that enables it to achieve persistent differential returns

or to put it another way to be way more profitable than their closest competitor

and do so sustainably and this is adapted from a framework that Hamilton Helmer created in his

book seven powers the seven are counter positioning as a startup versus an incumbent scale economies

across a broad customer base switching costs versus other near competitors network economies

process power branding and cornered resource I was really smiling as you were defining that as a

persistent differential returns versus their competitors because I'm not sure that Lockheed

has differential returns versus their competitors I don't know that there's really a market here

yeah and power kind of comes only in markets yes correct for this maybe it's more useful to talk

about the prime contractor industry as a whole versus any specific player well all the players

have the same profit margins too I guess where I was going with this is I think there's a cornered

resource and process power that the prime contractor industry as a whole has the cornered

resources they are the ones that get the prime contracts from the government and then the

process power which I think probably is really legitimate we talked to some folks in preparing

for this they are incredible systems integrators at what they do what did you say they're 4,000

or 3,000 subcontractors for the f-35 something like that it's nuts to orchestrate that and

coordinate that into an airplane that does the things that that airplane does in practice

that's hard I can't believe it's not all made by the same company the fuselage is made by a

different company than the wings are you freaking kidding me and that thing works didn't you say

that different parts of the fuselage are made by different companies yes on different continents

yeah there's definitely process power in that you can't just pick that up out of Lockheed and

go put it somewhere else and expect it to function right yeah there's a hundred years of know-how

and 50 years of very well-honed ways of engaging with the customer here the customer again being

the Pentagon right the customer it's like big brother the customer I think you're right that

we should think about it as the primes versus everyone else it's really hard to become a new

prime yep maybe impossible you know Palantir has sort of done it I guess

Andrew is kind of doing it but these I think are still pretty small scale compared to the big

primes the 50 billion dollars of spend that the one customer has with the one company yeah it's

really hard to break in and be a prime yeah I mean it's funny like Lockheed versus Northrop

there's not counter positioning really there's not scale economies because there's one customer

to amortize costs across but you're actually not doing any fixed cost stuff your customer is

absorbing all the fixed cost stuff too switching costs I guess but every time there's a new program

they rebid it out and the government's typically excited to give it to not the incumbent because

they actually they want to rotate these programs around so fighter jets are typically not made by

the same company two generations in a row although Lockheed Martin has sort of shown with the f-22

and the f-35 that they have won that I think you're right on process power broadly but

is Lockheed Martin's process versus Northrop Grumman's process no branding I don't think matters

here really I mean in cost plus contracting you're just actually not willing to pay more

to one company than the other so cornered resource no not versus each other yeah right

so there really isn't power yeah within the industry but to the extent that you have already

become one of these five then together the five have power versus new entrants which is so funny

you know you really I think kind of nailed it at the beginning when you said this isn't a market

it's not a market and I guess duh obviously it's not a market because there's only one customer

you can't really have a market when there's only one player on one side of it

yeah that's all I got for power yeah me too so as we drift into playbook I think the lens I kind

of want to take on this since we did so much analysis over the course of the episode is

what are the big takeaways like if I'm really sitting here stewing on all this thinking about

like what matters in this episode one of the big ones is that Lockheed Martin has a dual purpose

for existing there's all the normal stakeholders involve customers employees and shareholders that

they want to produce value for but there's this second thing where they exist for the good of

America and its interests which causes some interesting second order effects and one being

what is the optimal number of competitors in the space the government tries to optimize this as a

heavily interested party but before 1993 there were way too many competitors after 1998 they

determined we don't want to have any fewer competitors but it's sort of odd that there is

a force that is not the market that is dictating how this plays out because that force in this

case the US government is sort of in charge of all of our well-being in a way where they don't

trust that the market will look out for that and when I say that I mean if you left a free market

to play out what would happen is a you'd sell arms to our enemies which the government doesn't want

b a bunch of companies would put each other out of business and we might lose our industrial base

people would start outsourcing to other countries we would potentially lose capability if the

government stopped buying it for 10 years but we wanted it 10 years later and we got in a war

oh this almost happened right the government didn't let Lockheed go out of business in the 1970s

this was right as the kennen satellite project was getting going we could not let Lockheed go

out of business because we needed that right so a market cures a lot of problems like price

serving the best product to customers you know there are exceptions on all these things

but it doesn't solve for making sure that America stays globally competitive and so the government

has to put their hand on the scale in all these different ways in this market for that reason

yeah well globally competitive is an interesting way to pray safe and globally dominant maybe let's

put it that way that's probably the right way to put it there's a second thing here which is

we literally fund these companies to keep them alive so that they keep employees trained

should we need the employees trained which is like something that doesn't really exist

in other markets which also is a huge part of the military side of this complex right of the two

million people employed by the military in the united states do we need all two million of them

today no it's to keep people in reserve literally that's not a market driven organization nor i

think would anybody argue it should be right yeah this gets into sort of the like arguments for

and against the military industrial complex generally so there's this like a keep the

industrial base strong it's good that we have this big spend on industry because like we need

to have lots of people employed there and know all this stuff there's this second one which is like

it's literally a jobs program where you have congress people as we mentioned earlier voting

affirmatively for things because it puts jobs in their state this is kind of the most pernicious

argument of any of them for a pro big military industrial complex and in particular in this

book that you and i both read profits of war the book basically just argues that this is all a

massive misappropriation of funds and a whole bunch of people acting in their own self-interest and

not for the country's self-interest it is as far to the side of the scale of like the military

industrial complex is bad and evil is the profits of war book right so this is an excerpt from that

book the irony is that almost any other form of spending from education to health care to mass

transit to weatherizing buildings even a tax cut creates more jobs than military spending

and that just falls on deaf ears over and over again with these programs f-22 in particular as

that book points out this like it creates lots of jobs that argument continues to win the day

this 95 000 people are required to build the f-35 it's like oh good jobs for americans

and like that is a terrible reason to fund something right it's kind of like i'm thinking

about the recent period in tech companies in silicon valley that we are mercifully exiting

out of now where it was all about employee head count and capturing engineers and facebook had

god knows how many people working on oculus and like why you know that was the equivalent of the

f-35 yeah i google sort of cornering resources on really smart people despite the fact that

they weren't getting any economic output out of them right i mean the biggest argument again

states all the way back to 1961 and eisenhower's farewell address he gave this sort of legendary

military industrial complex speech where he says in the councils of government we must guard against

the acquisition of unwarranted influence whether sought or unsought by the military industrial

complex the potential for the disastrous rise of misplaced power exists and will persist it's

interesting right two things one i think that was maybe in part from observing what was happening

in the soviet union where the military and military spending overran the whole rest of the economy

clearly as we're talking about here like yeah i think this is a nuanced issue and

certainly a lot of degree of non-market based dynamics are warranted here but you can't let

the military industrial complex get so big it over runs the rest of the economy that would not be

good the other thing i was going to say is i think the end of that quote or speech or at least part

of it is you know eisenhower sort of i think very naively puts forth the solution is uh what does

he say like an engaged and vigilant citizenry you know a populace especially this day and age

of things are so complex that's kind of not possible you know is the average person really

gonna dive into the details of how the f-35 program works like no right that's not a good

outcome either if everyone's preoccupied and keeping an eye to make sure big complex doesn't

get too complexy right yeah there's another one i've been thinking about which is a parallel to

our space x episode where if you'll remember on the space x episode we talked about and gosh

that was a lifetime ago three years about how nasa prioritized safety over everything else

and so they took that to such an extreme where things could happen on a 20-year time span

instead of a five-year time span and space x came in and said what if we do it on a two-year time

span and we figure out how to be much more iterative in our development and we're happy to

explode some rockets not with people on them and you sort of take this again much more silicon

valley approach to rapid iteration testing your own prototypes internally being okay showing off

your failures and gathering data from them whereas nasa couldn't do enough calculations before it

finally was willing to do something to let something go to a launch pad and that would cause

extreme delays massive budget overruns and at the end of the day it actually wasn't safer

that's the important thing here in 130 or whatever it was space shuttle missions

there were two that were tragic loss of life calamities and so you look at that you're like

that's actually not a great safety record so maybe this isn't the right way to do it maybe

calculating something to you know 15 significant digits of unlikely to fail is not actually the

best outcome and it sort of seems like the same thing in the military industrial complex where

we're willing to sign a contract for airplanes that we get in 25 years because there are these

like big huge productions and it's just the opposite of the skunkworks way of operating where

test your own prototypes do it rapidly start moving up and up and up crash some planes in

the desert but overall we're going to get to the same outcome much faster on a much lower budget

and maybe with equivalent or better safety a hundred percent well i can't think of a better

place to talk about and what i think are really like the takeaways for me at least and i hope for

many people listening of this episode and it's really like the heyday glory days whatever you

want to call it of lockheed both with skunkworks and lmsc of how these small skunkworks type

organizations achieved unbelievable unfathomable things with a small number of people in an

unrealistically tight time frame with very constrained resources and that mindset is

certainly not the only way that you can achieve great things but it's a really damn good way

to do it and that mindset got injected into silicon valley by these people by the military

and by lockheed and it's just so funny that the military industrial complex has now become the

opposite of that has become like what you're talking about with nasa again there's many ways

to succeed in different situations call for different things but like if you really need

to or want to achieve something great bordering on impossible in a tight bordering on unreasonable

time frame kelly's 14 laws and lmsc's seven tenants are a pretty damn good way to do it

that's so true otherwise you get to this thing that norm augustine said how unbelievably expensive

these things get if you do it the non-skunkworks way and we just move into this larger and larger

morass that we're sort of the direction we're basically going in in these 25-year programs

and he says in the year 2054 the entire defense budget will purchase just one aircraft this

aircraft will have to be shared between the air force and the navy three and a half days

per week except for leap year when it will be made available to the marines for the extra day

he really is such a character truly but the craziest thing is much like morris law he

accurately predicted the rate at which aircraft prices would continue to grow starting way back

in 1983 he actually wasn't far off on the f-35 on sort of his prediction on how expensive it

would be on the cost curve to exactly your point if you continue at current course and speed

we basically will have only billion-dollar airplanes going forward they'll be made by

everybody there will be no new entrance innovation will happen very slowly very slowly when you look

at Lockheed Martin as a business they're going to do just fine for a long time no doubt about it

they're an incredibly protected insulated business with an unbelievably wedded to them customer

and the creative destruction cycle will happen on other frontiers yeah there will be some

existential need to create something that these companies are bad at creating and the us government

doesn't know how to buy from them and the united states will have to figure it out another way

and whether that's cyber security or whether that's information warfare or whatever it is

whatever threatens the american way of life i have pretty high confidence the american government

will figure out some way to make sure that we prepare for that issue whatever that issue is

and it may or may not be from one of these companies and it's very likely that the skunk

works mentality ends up solving more problems for our country but probably not from the skunk works

division of Lockheed Martin and you know i guess what is sort of hardening at least as an american

is the capability to do this definitely still exists it just happened with vaccines for the

totally yeah operation warp speed is a great example of rip down all the barriers and figure

out how to do something even if there's some risk yep you know what that's a good way to put a threat

kind of the back to the lmsc tenant number one that we talked about so long ago in the story of

focus on a threat-based need i maybe want to evolve some of my comments earlier about competition

into that competition creates threats it's not always competition that leads to a threat

human beings and organizations tend to perform at their best in response to threats

otherwise how are you going to be motivated to go to unreasonable extremes if you're not facing a

threat yeah no i like that nuance which is kind of a you know to this playbook of like

i certainly don't want to say artificially manufacture threats but if you're building a

company certainly this exists in startup world you have an implicit existential threat all the

time as a startup before you reach cash flow profitability which is like you got to make

payroll and you gotta like either get profitable or raise another round of funding or you're done

yeah i think you're right i think we're quickly sort of teasing out there's sort of like two

different things here it's lockheed martin exists to ensure the american-ness continues

as we know it today current course and speed as protected as it needs to be with the types of

protections we need great we know where to get that and i have no doubt that will continue happening

and also there will be other motivations for people to form tight-knit teams and accomplish

great things and like those are going to be four other threats and happen by other groups of people

and i want to hear your thoughts on that maybe this is the place to leave it rather than grading

this time let's come up with kind of the main takeaway but i'm curious what you think i like

that a lot it's probably a good thing that the nature of that motivation and the introduction

of those threats to spur human ingenuity and creativity has moved for now at least mostly out

of the war arena it's probably good that it's not threat of nuclear war that is motivating

people to achieve great things most people yeah yeah most people at least right now mercifully

thankfully and that mindset was directly transferred from lockheed in the military

into silicon valley that's how silicon valley operates today and that's what makes it special

and it doesn't have to be because of threats of war and it's a good thing that it's not

all right i think that's the right place to leave it you want to do carve outs yeah let's do it my

carve out is a fun one i was reminded of because my favorite video game history podcast series

resonant arc is covering it as their game right now i think i might have had this as a carve out

a couple years ago the game near automata is a super fun game and the series that resonant

arc is in the middle of is their video game storybook club going through it it's both a

really fun game to play and was kind of ahead of its time this sort of theme of the game is all

about can machines think and feel and what does that look like and like oh it was like really

thought provoking at the time it's particularly thought provoking right now in our era of you

know open ai and gpt and generative ai and all that so it's really fun to revisit that along with

the great resonant archives right now talking about the themes of that story nice you'll have

like a whole niche of people that are listening to your carve outs for video game video game rex

totally i have two one is something that didn't quite fit anywhere in this episode but if you

love airplanes and you are excited about the sr 71 you should google the sr 71 blackbird speed

check story it's an awesome story that i'm not going to spoil for you but is uh about pilot jocks

at their finest and a triumphant blackbird it's a joy to read it takes like two minutes i think

you'll like it we'll also link to it in the show notes the second one i have is very very boring

carve out but it's something i've found surprising ego lawn tools ego is the brand they make

effectively the tesla of lawnmowers and growing up i had like a big gas lawnmower and you'd like

pull a cord to start it and it was loud and it was smelly and it was dirty and it was like gas

and these are battery powered lawnmowers that are insanely powerful i have a leaf blower also that

lasts like 30 minutes off of just a battery look at you you're just becoming a dad i'm finding

some like very good catharsis in i just throw on audiobook and as i'm researching an acquired

episode and like go do lawn work for six hours and i find that to be like greatly gratifying

to get away from a screen i've chosen to go the uh higher gardeners route on this uh you can you

also have a two-year-old so yes that takes more of your time well and the nature of a yard in

san francisco is a little different i'm not sure i'm capable of maintaining my yard uh given

everything that's back there it requires more technical expertise more systems integration

more systems integration all right listeners thank you so much for joining us if you want to

become an lp we would love to have you help us pick more episodes like this one in the future

acquired.fm slash lp and when i get back from uh berkshire i think we'll do a an lp call here

in the next month or so you should totally check out acq2 if you like hearing us interview other

people i can assure you the next few interviews are going to be oh they are going to be great

even the ones that are live now the one we just did with jake the one with avlok from angel list

the one with david from retool fantastic kamakshi with her company samuha all like really fascinating

discussions look up acq2 in any podcast player now that you're done with this episode come discuss

it with us acquired.fm slash slack we'd love to have you and particularly too i think there's a

good chance with this episode that we'll have a lot of new to acquired folks who are listening

we unexpectedly had that in huge numbers with our lvmh episode all sorts of new people coming in and

experiencing acquired and listening to us for the first time if you're doing that now here with this

lock heat episode definitely go check out some of our other episodes on other industries and i just

want to second what ben said join the slack and come talk about it with us we love hearing from

people you know we're obviously not in the defense industry we love hearing from people who are tell

us about your experiences what it's like what we got right what we got wrong and educate all the

rest of us in the community too yep seriously all right with atlasers we'll see you next time

we'll see you next time

who got the truth

is it you is it you is it you who got the truth now

[Lockheed Martin: The Architect of Modern Defense and Silicon Valley]-[Lockheed Martin]

📋 Summary

The Evolution of Lockheed Martin: From Aviation Pioneers to Defense Titans

The Skunk Works Era: Engineering at the Edge

The Birth of Silicon Valley and LMSC

The Modern Defense Industrial Complex

Conclusion: The Paradox of Power

🎯Key Sentences

📝Key Phrases

📖 Transcript

[Lockheed Martin: The Architect of Modern Defense and Silicon Valley]-[Lockheed Martin]

📋 Summary

The Evolution of Lockheed Martin: From Aviation Pioneers to Defense Titans

The Skunk Works Era: Engineering at the Edge

The Birth of Silicon Valley and LMSC

The Modern Defense Industrial Complex

Conclusion: The Paradox of Power

Deep Learning with ListenLeap

🎯Key Sentences

📝Key Phrases

📖 Transcript

ListenLeap Brings You Into Real Context Learning