Lockheed Martin

Those two movies are so freaking good. Yeah, 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 FA-18 Hornet, the Boeing plane, and by the time the movie gets released, it's basically discontinued within a couple years. That's when they end of life the FA-18 Hornet for the Navy. Yeah, did you catch the Lockheed thing in Maverick? The skunk on the tail of the plane?

Yeah.

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, I'm 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.

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 gonna do that. Instead, we're gonna 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 gonna 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.

Oh, 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 LP.

We've got some awesome interviews coming up to ACQ to is on fire. Yep, join the Slack acquired at 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 a log head.

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 gonna 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.

You may know Memorial Sloan Kettering, exactly same dude.

So the idea was they were gonna 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.

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, what everything you know of Lockheed today got bought out of bankruptcy for $40,000. It's crazy. So under Robert Gross and his brother Cortland, who gets involved, they really are the ones who turned Lockheed into the great company. It became so before World War Two.

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.

Skunkworks division And this is great because before I started the research, I was loosely aware that Lockheed had the first skunkworks. Now it's become almost like Kleenex when someone says, skunkworks, oh, we're gonna start a little skunkworks division. And, like, it was not a thing until Kelly Johnson started the Skunkworks.

So there's a wonderful book, there are a bunch of wonderful books around Lockheed. But a book titled Skunkworks. That was written by Ben Rich, who was Kelly's second-in-command for a long time at Skunkworks, 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.

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, so we did.

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 5 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.

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 US'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 overseeing 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 a harrowing and heavy, but I think that that's an experience I'd recommend to anyone.

Okay, 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 gonna win the war at this point in time. But it's also becoming evident 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 in Dan Carlin.

And for anyone who's not an AV geek 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.

My understanding is the engines that airplanes were flying before then, even the P38, 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 gonna focus on that first, the other problem to put a pin in for later, you know, 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.

600 miles per hour, not quite the speed of sound, not quite Mach 1, but approaching that something like 80 ish percent to Mach. Yep.

So Johnson handpicks 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 Skunkworks 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 era alcohol. And this still in the comic strip was called the Skunkworks. I think it was called the Skunkworks.

Seriously, so this 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. A.k.a. Doesn't make the beer taste better or make the plane fly faster.

Exactly, and outsource everything else. And if you only have a hundred and eighty days to do it, you are not going to become an engine manufacturing company. You are going to look around and say, Okay, 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 H1B Goblin engine, and that is what they put in this prototype.

Yes, this prototype, the Lulu Bell, would go on to become the P80 shooting star. Lockheed would ultimately make about 2,000 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 Skunkworks. They are not engine manufacturers. All of the engines that were going into the planes before, during, since, they're getting from other companies.

That is true across the aerospace industry. That's an interesting that the value chain of all this way were basically no. Aircraft manufacturers to this day make their own engines and commercial. 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. Yep, so this amazing feat. Building what becomes the P80 shooting star, and the U.S is first jet fighter plane in less than six months. This is the beginning of Skunkworks, and Kelly realizes, Hey, this is something pretty special here. So I want to read a little quote from the Skunkworks book. That primitive Skunkworks operation set the standards for what followed.

So the P80 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 Skunkworks 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 Skunkworks at the same time.

It's insane. This not taking too much money thing does become a core tenet of the Skunkworks 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 Skunkworks 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.

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 look 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.

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 to 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 10x, 100x engineers. So you really only need a handful of really good people.

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Thanks service now, 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 gonna 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?

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 gonna highlight here. We already talked about number three. What are your others?

The next one I want to talk about is the Skunkworks 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 call in the sales force and being like, Hey, can you go to a steak dinner with our guy in Washington?

I think was about maybe 50 designers and engineers, and maybe a hundred 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.

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 rules, 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, Hey day 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 got to think back. This was a time where Americans superiority was not guaranteed. I think we have a reasonable amount of complacency today. Americans feel very secure, sure.

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 gonna 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.

Okay, 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 P80 shooting star. The other problem is, yeah, we're gonna 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 gonna win. So, right after the war, Churchill comes to America and gives his famous iron curtain speech in Fulton, Missouri. Then 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 gonna 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.

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 militaries primary sounds cliche to say, but sword and shield during this war.

Yes, so this brings us to the you to 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 time frames for very different reasons. Yes, that we will talk about in the military industrial complex. But the YouTube 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.

Okay, 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.

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, it's funny.

It's got 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.

Even if they do, and so Skunk works, 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.

40,000 feet The U.S. thought that the Soviets best interceptor fighter aircraft could get to about 45,000 feet.

Yep, 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 you two is to fly at 70,000 feet. Now there are a couple 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.

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 gonna 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 Skunkworks win the contract from the C.I.A. 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 it hit him like a sack of cement. You know how important this was, so Skunkworks 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 Skunkworks 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 into spacesuits for the first time, feels like to be a reconnaissance aircraft.

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 U.S. had someone who was just incredible at this sort of pioneering optics technology.

Indeed, the U.S. 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 bill.

We can do this project. This blew my mind. 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 You twos camera.

Oh, just wait. We are gonna have a lot more tech in Silicon Valley and Apple stuff that's gonna come up here in just a little bit. So they build the plane, you got to test this thing. They're not gonna roll it on the runway in Burbank and take off. And, you know, just head for the Soviet Union.

We test our products and we should be clear. This you to spy plane looks crazy. It has a hundred foot wingspan. Yeah, this thing. If you saw it taking off, you would be like, Okay, 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. Oh, this is so fun. Oh, 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.

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.

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 continued right nearby. While they're using this site, Groom Lake to test the you to 100 is 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 gonna see some really weird flying stuff, so of course the rumors are gonna start.

Oh, it's even better than that. I can't remember which plane and or when this was, but at one point in time there, one of the test flights crashed. And you know the pilot who survived. And like somebody saw him, he was wearing a space suit. nobody knew what a space suit was, of course.

It would be another 10 years before we would have the moon missions. Yeah, it's so funny.

Amazing.

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

Okay, so they test the you to an 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.

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 gonna 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.

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

So we're both maintaining this. We're not at war, you know, and we're not gonna tell you that we're preparing for if we need to be. But of course, we're gonna do whatever we can to understand the best about our enemy, or not our enemy, 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 you two in 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 you to 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. 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. You know, 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.

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 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 pilots name was Francis Gary Powers Pilot Powers. If you know anything about U.S. 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 YouTube 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.

Escalate to war. If we kept doing this, we have to stop. The YouTube 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?

Yes, and this listeners is where? If you've read Skunkworks or watch 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 YouTube. 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.

It's kind of well when we first started working with Vanta and met Christina, my gosh, I've. They had like a couple hundred customers, maybe now they've got five thousand, some of the largest companies out there, it's awesome.

Yeah, and they offer a tremendous amount of customization now for more complex security needs. So if you're a larger company and in the past you showed Vanta to your compliance department, you might have heard something like, Oh, well, we've already got a compliance process in place and we can't integrate this new thing. But now, even if you already have a SOC 2, Vanta makes maintaining your compliance even more efficient and robust.

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Okay, 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 8 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 setup from the IEEE Silicon Valley History Video. So industry association, this thing has a hundred and twenty four views after being posted seven years ago.

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.

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 Turman 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, Turman 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?

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. Know where the university has as good of a tech transfer policy as Stanford. They're notoriously friendly. Yes, notoriously friendly.

Stanford owned 1 of Google Let's Been 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 is what we need to keep, or 33 is what we need to keep. And they would have smothered the innovation before it could become commercially viable.

Now I sort it in the back of my mind and 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 cuz Stanford in 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 thanks to Turman 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. And 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 pre-order 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.

Customer hang on to that thought for one second.

If you were doing all of this ten 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 Turman'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.

I don't know that we've ever really told on Acquired. There are a lot of skunkworks 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 Skunkworks and took so many of the Skunkworks management principles up to Silicon Valley. I was reading Skunkworks. I'm like, Oh yeah, so many of these principles, they sound like Silicon Valley principles.

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 101 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 Stanford Now Research Park and is still there to this day. Wow, now they can't actually do everything they want to do on the Stanford campus, you're not gonna build a missile and test it on the Stanford campus. So Lockheed. Pretty quickly after they established themselves in Palo Alto.

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-60s, they would employ a 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, Intel and all that Cisco, there was none of that.

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 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 hangar. You're gonna build missiles in, and they end up building a lot more than missiles.

We're gonna 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 Capitol episode, when we were telling Don Valentine story. And at the time when we were telling the story, we're 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. 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. To. 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 ten times more employees at Lockheed in Silicon Valley than at HP in the late 50s.

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, was his dad. The reason that Steve Wozniak grew up in Silicon Valley is directly because of Lockheed Martin. Oh, that is awesome.

No Lockheed, no was 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 Turman. 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.

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 50s, 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.

Okay, 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.

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 gonna fire these things from the surface of the ocean, submarines gonna rise up, they're gonna like, stabilize it in water, and they're gonna fire off a missile. From the deck of a ship or a surfaced 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 will 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.

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.

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 on the Amazon episode. Oh yeah, Bezos, his dad worked there, right? Grandfather Bezos, his grandfather, was the head of Sandia, which was in New Mexico. The military nuclear program, the division of the U.S. 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.

Yep, 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 gotta say it is so fortunate and insane to me that neither side ever launched. All the deterrents. 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 in 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.

Okay, 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 5,000 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.

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. 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 I and other places. To 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. 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, it's super interesting.

Okay, so if you 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 YouTube was shut down in May 1960, that supposedly this was the end of U.

Eventually, after the YouTube, Skunkworks 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. Hmm, we just didn't want anybody to know about it, and so everybody's now it's like all the Blackbird.

It kind of never needed to be because of LMSC in space. Whoa, all right, I'm listening, Okay, you got a lot of hairs on my arms.

Here we go. So when you think about America in space in 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 and was 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 gonna be actual applications in space anytime soon. There's no infrastructure.

How did we launch them with nobody lay it 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 life-form research in space. Like they were sending animals up to space, like monkeys to prepare for manned space flight, 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.

Yeah, I downloaded it and I have it open my computer. It's pretty crazy. It says secret, it has the classification on it, and then it's struck through. Yeah, it's literally the document that was prepared in secret and then declassified.

I think what the C.I.A. 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. Oh, let's get into it, okay? 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, has 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.

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? State? These were not digital photography, this was film freaking photograph.

They dropped it okay, 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 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.

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 a literally 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.

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 gonna.

See, I mean, when you have an satellite orbiting the Earth that fast that I don't know what it is. Mach 20 something. It's pretty hard to predict exactly where your tiny film canister is gonna come back and land and all this.

Happened in 1960.

Future satellites attached to. And I think they sort of pioneered 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 gonna take photos at 5-foot resolution of the ground.

39,000 man-made objects from space They took 2.1 million feet of film of photographs in 39,000 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 would 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.

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 launch Canon KE NNE N, which this is still like, very classified. Some of it is out, so I can. We can know a little bit about this. There actually was an incident in, I think it's 2019 when Trump was president. He tweeted a no 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 Canon program.

By the way, you keep saying Google Maps. There's a fun piece of trivia that I'm curious, if you know. Oh, do you know? I think it was the code name, the original name for the corona program. Oh, keyhole.

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. Ooh.

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 gotta know when you know, the weather is gonna 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 till researching all this.

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. Haha, that's so awesome.

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You might have. We're pumped to be working with them. You can click the link in the show notes or go on over to Statsig comm to get started. And when you do, just tell them that you heard about them from Ben and David here on Acquired. 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.

Became the crown jewel of the company, huh? Which isn't true anymore. Well, 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 one way, 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.

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 Skunkworks is LMSC's operating principles and philosophy. And so much of that was built off the shoulders of Skunkworks. And a lot of the guys in the YouTube videos that I found talk about this, their philosophy, though. They codified into seven tenants, so Kelly had his 14 rules, LMSC had seven tenants, and most of them are very similar to the Skunkworks rules. We'll link to a image of them in the show notes.

Is this obviously what Skunkworks 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.

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.

There was a market need. was there a threat-based need? Okay, so.

Skunkworks 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 C.I.A. and Skunkworks is already hard at work at the successor Airplane. To the you, to 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 you choose 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.

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 vectors that were possible for how you could operate a program like this. One was fly high enough. That's what the you to ultimately did.

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.

They're not gonna 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, you know, missiles. It had to do that with a pilot, there had to be humans in this thing. Faster than Mach 3 is faster than 2,000 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.

For being placed in the National Air and Space Museum. Yep, coast to coast in an hour.

84,000 feet up 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.

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 pilots gotta fly this thing, and these are rocket engines, either jet engines that they figured out how to make, go Mach 3.

Yep, okay. So when Skunkworks 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 F-4 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 F-4 itself was only a bit faster than the Skunkworks built F-104 Starfighter. That Ben you mentioned earlier, which was the first collier trophy that Kelly Johnson won. So the idea that you were gonna 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.

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. 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 a thousand. Yes, and the engines?

I think inside the engines get too close to 3,000 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, the A-twelves, 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.

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.

It's just gonna leak fuel all over the tarmac. Oh my god, this is one of the reasons why I am. It is maybe spoiling it a little bit. But to flash forward, the Air Force hated operating these things. Yeah, I mean, it cost, I think, 300 million dollars a year just to maintain these things.

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 A-12 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 at 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, these spikes, these big spikes. I mean, I'm sure everybody listening has seen a photo of Blackbird.

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. These things are superchargers.

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 Skunkworks 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, Skunkworks in the C.I.A. had started working on the A-12 Oxcart before Gary Powers was shut down. It takes, believe, quite a while to engineer this beast. They start test flying it in April 1962, of course, that area 51. where else are they gonna do this once they start test flying it?

71, Yes, 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 does? What is relevant, though?

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 70s.

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 gonna 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.

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 orbit coverage for, or where there's a dynamic situation. If an enemy knows that a satellite is flying over it and doing reconnaissance, they know when the satellite is gonna fly over so they could hide stuff during those times. If you need full flexibility, you need a Blackbird.

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.

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's 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 a round 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.

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 dollars per plane, which was a lot back then. I mean, plates now cost more, but a lot. And then, as I said, $300 million a year just to keep them operational and run the program.

It's a lusty airplane. yes, it's not a daily driver, let's put it.

In.

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 gonna 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 Skunk Works revenue. They're not producing these things anymore. On the back of that, Skunk Works has to do layoffs the Skunk Works division after the contract is canceled in 1972. Two years later, Lockheed and Skunk Works lose the bidding for the F-16 fighter.

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 gonna 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.

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 Americans 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 proactivity 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 is doing layoffs.

Hmm, 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. Hmm, 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 Overhauser, who was a mathematician. And he, like he said, reads this paper and brings it to Ben Rich, who just six months earlier had taken over from Kelly A.s.

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 gonna use the Skunk works for branding and marketing. But we're not doing anything too nutty. And you're a 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.

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'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-117 a. 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.

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. These big-ass triangles, big-ass triangles, that's what this thing looks like. It literally looks like a 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.

Research contract We're gonna 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 all 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 is the Pentagon think, which is a good and a bad? They're unbelievably customer focused. Lockheed Martin doesn't build stuff unless the U.S. 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.

The thing is 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 Skunkworks 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 Skunkworks history. The way you control this thing is with fly-by-wire, which I'd heard that term before.

Right, I mean, it's 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 Stealth 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 Skunkworks, they ultimately buy 59 of them of the F-117 A Nighthawks at 43 million dollars each. So that is two and a half billion dollars in revenue for a Lockheed. A time when they desperately needed it, and Skunkworks desperately needed it. Huge win for Ben Rich.

So that's what six years that they keep it undeployed where they have it, but the U.S. government has decided that we want to save it. Well, where are they gonna 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, again, Skunkworks hasn't built one of those since. I guess what the?

104 Starfighter I think that's right. I mean, yeah, the f in F-117 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 Nighthawks. 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 skunkworks 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 Two, 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.

So well, 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-117 A.

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 Skunkworks 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. Yeah, 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.

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 U.

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 crime defense contractors to a dinner in Washington, at which he explicitly tells them defense spending is going to shrink massively. Duh, 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.

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, yeah, 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. Like, what do you actually do?

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 Hennessy 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 spinouts 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, oh yeah, 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.

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 L'Oreal for almost ten billion dollars. 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, every signed off, the DOJ blocks it, I assume, with tacit approval from the DOD on that.

Yeah, I mean, that 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, like, 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 all the way back to the beginning of the episode. So the DOJ blocks that. But also in 1997, Boeing merges with McDonnell Douglas and becomes Giant that it is now. Do you know why that happened? Oh, I do not.

So we're gonna talk here in a second about the F-22 program. in 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 gonna 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 90s, there's Lockheed Martin right after their combination, there's Boeing, and there's still Independent McDonnell Douglas.

Boeing announces that it's buying McDonnell Douglas. Yeah, that was probably the end of McDonnell Douglas once they got eliminated.

Exactly This contract is so big and they were betting so heavily on it that basically Boeing and McDonnell Douglas after McDonnell, 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 dollar DOD contract for 398 airplanes just for the U.S. We'll talk about that in a minute. 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 gonna hand it over to you in a minute to lead the discussion of all the dynamics around this, 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. But the merger happens, and Dan tell up. 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.

Yeah, and you basically have a situation where, like 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 the stasis. Yep, so Ben Rich basically called it in 1992 when he was talking about this at the end of the Skunkworks book. About the end of the B2 bomber program, which, by the way, the B2 was kind of a make good when they gave that to Northrop Grumman.

Yep.

So I think that sort of. 1992 Ben Rich publishing the Skunk Works book, Then The Last Supper. It basically marks the end of Skunk works. Skunk works is still a term that is used to describe a part of Lockheed Martin, but is it the Skunk works of the 50s, 60s, 70s? No, not at all, it's a completely different thing.

Dramatically went down to like half. I was wondering, I was like to bed. 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 gonna veto anything that comes to my desk. For any more raptors like, we're done with this, but it's not as good as it sounds, it's not as noble. The final, down from 750 to 339, is 187 planes delivered. They kept the 62 billion dollar total program cost fixed.

The stealth fighter, the Nighthawk, was angular and looked like a super Nintendo Starfox 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.

They used it in the arcade cabinets, right? These cutting-edge, better than home consoles, computers.

Virtua racer, Virtua cop, Virtua fighter. Being the big one, we're 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 that 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 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 gonna 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.

538 Principal Agent problems. And contrast that with the team of, you know what, 50 engineers and a hundred machinists that built the U-2.

Yep, so then there's the next program that comes along the F-35 Lightning to the Joint Strike fighter. And so, you know, the mindset here is, well, we finally get it. We need to make a lot of these things if we're gonna 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?

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 Two and the Cold War, and the military of World War Two 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, and 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.

The military, Well, I guess it is, you know, to the point of consolidation. In the last supper, the government was clear. We're gonna spend a lot less, we're just gonna spend it in a much more concentrated fashion.

Exactly, the military industrial congressional complex has, really. It's almost like, what's happened to the banking system? We like pseudo nationalize a few companies, there's these too big to fail.

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 healthcare. 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?

I get. The rest, I would assume, would come from foreign governments.

Correct, Yeah, our allies, because the U.S. government basically has a roofer on anything and can put the kibosh on Lockheed. Exporting to anyone, it's not terribly profitable. Their net income margin is 8. 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.

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 ACQ 2 at some point in time to talk about it. But my understanding is that while Warren Buffett and Charlie Munker hate 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 you, too. We don't know what the cost is gonna be, but we need it to happen.

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. 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.

This is sort of the great irony in the government. Together with Lockheed, really seeded Silicon Valley. The modern Silicon Valley and the modern defense industry are in many ways kind of incompatible from a business model perspective, right?

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 pre-loaded 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 Andrew 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 and 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 gonna go to a more interesting, modern company. And that's why you see the And Drills of the World and the Palantir's 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 Two, 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, 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.

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 a 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 U.S. And I don't think we're indexed in that direction even. 1. 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?

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 U.S. 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.

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 skunkworks, so that's F-35s, F-22s, the old F-16s, the C-130 J Hercules airlifter.

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.

Interesting is that because Bezos doesn't want to launch on SpaceX, neither company will really like say anything about that.

It's gotta be something in there. 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.

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.

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 and 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.

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.

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.

Oh, this almost happened, right? The government didn't let Lockheed go out of business in the 1970s. This was right. As the Kenan 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 and all these different ways in this market.

For that reason, yep, 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 in. 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. 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 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 headcount 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 against dates 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 overruns the rest of the economy.

That's not a good outcome either, if everyone's preoccupied and keeping an eye to make sure big complex doesn't get too complex. II, right? Yeah, there's another one I've been thinking about, which is a parallel to our SpaceX episode, where, if you'll remember, on the SpaceX 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.

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 Skunk Works and LMSC. Of how these small Skunk Works 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.

Otherwise, you get to this thing, that norm, Augustine said. How unbelievably expensive these things get. If you do it, the non skunk works way. And we just move into this larger and larger morass that we're sort of the direction we're basically going in. And 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 Moore's law.

You know, I guess what is sort of heartening, at least as an American, is the capability to do this definitely still exists. It just happened with vaccines for the corona virus, 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.

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 Americanness 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.

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 a 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?

Nice, you'll have, like a whole niche of people that are listening to your carve outs for video game, video game wrecks. 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, that you should google.

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. I've 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 at FM Slash LP And when I get back from Berkshire, I think we'll do an LP call here in the next month or so. You should totally check out a CQ 2 if you like hearing us interview other people.

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 Lockheed episode, definitely go check out some of our other episodes on other industries.

We'll see you next time, we'll see you next time.

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You?