Lockheed Martin

0:00 Those Two Movies are so Freaking good. Yeah. It's so shocking how good Maverick is.

0:08 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 eighteen hornet, the Boeing plane. And by the time the movie gets released, it's basically discontinued.

0:27 Within a couple of years, that's when the end of life the F eighteen Hornet for the Navy. Yeah. Did you catch the Lockheed? Thing in Maverick?

0:36 The skunk on the tail of the plane. Oh yeah. On the uh Mach Ten Darkstar aircraft. Darkstar. Oh God. Alright, let's do this. Who got the truth?

0:51 Is it you, is it you, is it you Who got the truth now? Is it you, is it you, is it you Me down. Straight! Another story

1:05 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.

1:22 They are the nation's largest defense contractor. They're actually the federal government's largest contractor, period. The American taxpayers pay Lockheed Martin around fifty billion dollars a year. And just to state this early and clearly. Lockheed Martin makes, among other things,

1:41 Killing machines. The company is of course critical to defending the American way of life. And most of these things they make, fortunately, are used as deterrence to keep peace. But we should not mince words. They make weapons synonymous with phrases like overwhelming force and air superiority.

1:58 you may feel and probably should feel conflicted. as you learn about this company. There are really no easy answers to the question. is what they make right or good. And that's why we entrust the decision to use their products to the office of the president of the United States.

2:15 But this company's history is absolutely fascinating. There's stories of hardcore engineering, daring innovators, and it's frankly just Inspiring. Yeah. Going back and learning all this and soaking in the history. Of the times when Lockheed was really forged.

2:31 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,'cause I think it's like seventeen companies all merged together at this point. Would probably require a full season of acquired, so we're not gonna do that.

2:51 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.

3:07 It's unbelievable and is directly tied in to the birth of Silicon Valley. So if you're in the tech world and you think Lockheed Martin and defense and fighter planes doesn't apply to me. Think again because pretty much everything you do. Came out of this. So I can't wait to tell it.

3:25 Ooh, 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 any time at acquire dot fm slash LP.

3:45 If you want more from David and I, you should check out our interview show, ACQ2. Our last episode was on the topic of how generative AI can be valuable specifically to B2B SaaS companies. And Probably more importantly where it cannot.

4:00 And listeners, you can just search ACQ two anywhere podcasts are found. We've got some awesome interviews coming up too. A CQ two is on fire. Yep. Join the Slack, acquire.fm slash Slack. We'll be discussing this episode there afterwards. And without further ado, David, take us in. And listeners, as always, this show is not investment advice. David and I may have investments in the companies we discuss, and this show is for informational.

4:23 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 is was two companies. It was Lockheed.

4:37 And Martin Marietta. And there was a huge merger in nineteen ninety five. Lockheed. was actually the second Blackheed company, or really maybe the third. The first Lockheed company was founded in nineteen twelve.

4:51 By one. Alan Lockheed, but if you were to look at the spelling of his name, it would look like Loghead. L O U G H E A D. Yes. But it was pronounced Lockheed because it is Scottish like Lock, like Lockness. Lackheed.

5:05 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

5:21 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 uh model G. And they flew tourists around over the bay and evangelized this new flying technology.

5:40 It had a bunch of ups and downs. Malcolm leaves the company and goes to Detroit to seek his fortune in the automobile industry where He invented The modern hydraulic brake system for automobiles. So every time you press the brake in your cars. You're using

5:57 Malcolm Lockheed's technology. No way. Yeah. Super cool. They also end up hiring into this first Lockheed company one John Northrop. Yeah. John. would go on to be a co founder with Alan of the second Lockheed company.

6:15 Then leave to strike out on his own where he founded the Avian Corporation. It gets acquired by Douglas and becomes a big part of Douglas. Douglas, of course, is now part of Boeing. And then after that, John, as you might imagine, founded, you guessed it, Northrop, which is now North Europe. Grumman. So this one dude is responsible for founding or playing a major role in three of the remaining five

6:36 defense prime contractors today. But Anyway, the first Lockheed company goes under. They start the second one a few years later. They have some success with the Vega airplane. People might be familiar with that. It becomes a favorite of Amelia Earhart and Wiley Post, famous early. Aviators.

6:53 It becomes successful, this second Lockheed company. They end up selling it. To a consortium of Detroit Automoguls. Maybe through the relationships from Malcolm or something. that have formed the quote unquote Detroit Aircraft Corporation or the DAC.

7:07 This is including Charles Kettering, the founder of Delco and head of research at GM, as part of this. You may know Memorial Sloan Kettering. Exactly. Same dude. So the idea was they were 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.

7:27 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 hairbrained GM of the air idea comes together.

7:42 And lucky to get sold too. The Detroit Aircraft Corporation. The stock market crash of nineteen twenty nine and the Great Depression happens and DAC predictably goes. Bankrupt. They sell off the Lockheed division, which is actually still fairly profitable.

7:56 out of bankruptcy to an entrepreneurial young businessman named Robert Gross. And this is really the founding of the modern Lockheed. And The craziest thing, this price that he bought it for Forty thousand dollars.

8:09 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 fifty thousand dollars, 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

8:25 And the winning bid was Ten thousand dollars less. So amazing. What Everything you know of Lockheed today. Got bought out of bankruptcy for forty thousand dollars. It's crazy. So Under

8:37 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, during the thirties. Lockheed builds the famous Electra airplane. Which is

8:51 Absolutely iconic. This is the plane that Amelia Earhart disappears in. Perhaps even more timelessly. This is the plane. at the very, very famous scene at the end of the movie Casablanca, when Rick puts Ilsa uh on the plane with Victor to escape the Nazis and says here's looking at you kid. That plane

9:10 Is an Electra I believe in Electra Junior. And listeners, you know this plane. It's one of those romantic early aircraft 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. Oh absolutely beautiful. The Electra and Casablanca.

9:29 Brings us to the first core part of our story. Which is World War Two. Which transforms Everything.

9:37 And a man named Clarence. Kelly Johnson. Who started the famous Lockheed Skunk Works division. And this is great because Before I started the research, I was loosely aware that Lockheed had the first skunk works.

9:51 Now it's become almost like Kleenex when someone says Skunk Works, oh we're gonna start a little Skunk Works division. And like It was not a thing until Kelly Johnson started the Skunk Works. So there's a Wonderful book. There are a bunch of wonderful books around Lockheed, but

10:06 A book titled Skunk Works. 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 are just fired up. Up. It is amazing what these people did. It's top gun for engineers.

10:25 Yes. It's so great. I also highly recommend A book called Beyond the Horizons, which is hard to find and most people don't know about. By Walter Boyne, and that is an amazing history of Lockheed during all these eras that we're gonna talk about. David, that's so mean. You're recommending an out of print book to people. We keep doing this. Uh this one I think I only paid like forty bucks for on Amazon. So It's not quite like taste of luxury in L VMH.

10:50 Which I think that's now like Three, four, five thousand dollars. Oh yeah. No, we definitely spiked the price. We did. All right, so who is this Kelly Johnson? He's basically the Shigeru Miyamoto of airplane design. Yeah.

11:04 His nickname is Kelly. Because when he was in grade school growing up in Michigan His real name was Clarence. An older boy called him Clara. On the school yard.

11:15 And Johnson attacked him so viciously that he broke this kid's leg. And so after that all of his schoolmates never called him Clarence or Clara again and they nicknamed him Kelly. Okay, so not Clara, but why Kelly? There was some character of Kelly.

11:30 Kind of an Irish tough guy. that they named him after uh that really was his personality. So after Every Skunk Works test flight for the rest of his tenure running Skunk Works. They throw a big party. And Kelly would challenge

11:43 Anyone, all comers, to an arm wrestling match. And even when he was like sixty years old, he was still beating people. You should Google a picture of this dude. He is just a nineteen thirties man's man at his finest. And maybe the best airplane designer to live. That is Kelly Johnson. And when you hear the stories about him.

12:01 he could intuit the answer to difficult math problems in his head. And not just math problems, but like physics problems and applying Bernoulli's principle. in his head and come up with an answer that was five percent off from the actual answer. And someone else would go spend hours and hours and hours with pencil and paper and slide roll to come to basically the same number. The quote from his first boss. Lockheed's chief engineer at the time.

12:24 Kelly would become. The chief engineer. But his boss at the time, Hall Hibbard, would say. That guy can see the air. Yeah.

12:32 So Kelly ends up winning the Collier Trophy twice, one of only two people to do so in history. The Collier Trophy is the equivalent of like the Oscar for Best Picture. It's the best airplane design of the year. He wins it twice. He ends up being bestowed the presidential medal of freedom by Lyndon Johnson later in his career. He is a true American hero. So he ends up joining Lockheed right out of the University of Michigan engineering school. I'm sorry, University of Michigan, you know, Ohio State, sorry, Ben. In nineteen.

13:00 thirty three, at twenty three years old. And Kelly. is really one of the if not the principal engineer that designs and builds the Electra. So he becomes the star of Lockheed's then only six. Person. Aviation.

13:14 design and engineering department. There were six people that were making these things. Crazy. And he does basically everything himself engineering, designing, testing, even flight testing. There's this amazing quote in Skunkworks. This is Ben Rich talking. Kelly once said that unless he had the hell scared out of him at least once a year in a cockpit, he wouldn't have the proper perspective to design airplanes.

13:37 Mm. So great. Okay. So the start of World War Two rolls around. And the first thing that Kelly and Lockhe do is they adapt The Electra.

13:46 into a bombing vehicle called the Hudson. And even before the US enters the war. The British Royal Air Force ends up buying about three thousand of these Hudson's. From Lockheed. Yeah, this is a thing that

13:59 was eye opening to me doing the research. Lockheed's big customer in World War Two before the US enters was Britain's Royal Air Force. They were a way bigger customer than the US was for many, many years. So then once the US enters the war and as they're gearing up to enter the war Kelly. Designs.

14:18 The amazing P thirty eight. Lightning. Fighter. Which was the US's elite fastest, most maneuverable aircraft during World War Two. They made over ten thousand of them during the war, and all of the top aces in the US Army Air Corps flew them.

14:36 It was the plane that shot down the transport that was carrying Japanese Admiral Yamamoto, the guy who had kind of masterminded and overseen the Pearl Harbor attack. This is a legendary airplane. Side note, I will say last week, partly in preparation for recording this, but partly because it's something that I've always wanted to do, I went to Pearl Harbor. And there is truly nothing like being there and experiencing that growing up in America, we basically haven't had attacks on our soil. It's nine eleven and Pearl Harbor period.

15:08 So it's a very unusual thing to see In your own country. the remnants of an attack and being over the sunken USS Arizona from the Japanese bombing, it's uh Harrowing and heavy. But I think that that's an experience I'd recommend to anyone.

15:23 Okay. So That was kinda Lockheed and Kelly during the war. Fast forward now to kind of the waning days of World War Two, end of nineteen forty four, into nineteen forty five. It's pretty clear that America and the Allies are gonna win the war at this point in time.

15:39 But it's also becoming evident that there are Two Big problems. That are emerging. One.

15:46 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

16:03 Powered. Fighter planes. have begun to pop up. And we're not a uh military history podcast. Save this for hardcore history and Dan Carlin, but my understanding of this is that the German jet fighters entered the war too late to make a difference, but if they had entered service earlier,

16:21 It would have been a Big problem. So the US and the Allies Like oh. Crap. We need to step up our game and get a jet fleet in service for us. A SAP.

16:31 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

16:48 completely transformative process of how the engine uses the air in order to create thrust that is much more sophisticated than just a propeller. My understanding is the engines that airplanes were flying before then, even the P thirty eight, as sophisticated as it was We're 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.

17:16 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. Yeah, 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. No.

17:31 We might have to address that in the coming decades. So keep that in the back of your mind as we go along here. But let's start with The jet problem. So The German plane that had started appearing in the skies over Europe was the

17:44 Messer Schmidt. M E two sixty two, nicknamed the swallow. And it was the world's first operational jet powered aircraft. It flew close to five hundred and fifty miles an hour, which is over a hundred miles an hour faster than any Allied plane, including the Lightning P thirty eight. So the U S government turns to of course. the very best person for the job to

18:05 start the US jet fighter program. Kelly Johnson and Lockheed. And they tell him Go make us a jet fighter. As soon as possible.

18:15 And by any means necessary. And when we say as soon as possible We want a prototype in a hundred and eighty days. Wow. With the spec that it must go faster than the German swallow. So at least six hundred miles an hour. You need to pull out all the stops. bypass any red tape, do absolutely Anything.

18:34 necessary to make this happen. And for those tracking along at home. Six hundred miles per hour, not quite the speed of sound, not quite Mach one, but approaching that. Something like eighty ish percent to mock. Yeah. So

18:47 Johnson. Handpicks. Twenty. Of the yeah. Very

18:54 Best engineers and designers. And about thirty of the best. shop people, the people that actually build. the airplane. And get this.

19:03 He rents A literal circus tent. To house them in the parking lot. Next to a plastics factory. That is nearby Talakid's headquarters in Burbank.

19:15 California. And it is because of this. That the name of the Skunk works. is born.

19:22 Because of the outdoor nature in the tent. And the smell coming from this plastic's Factory. At the time there was a very popular comic strip called Little Abner.

19:32 And a character in this comic strip had a uh outdoor moonshine still making bootlegged prohibitionera alcohol. And this still in the comic strip was called the Skunkworks. I think it was called the Skonkworks. That's right, the Skonkworks with an O. And eventually the publisher of Little Abner sues Lockheed over using Skonkworks, so they changed it to Skunkworks. So in this

19:56 Circus tent. In a parking lot. Kelly and this super elite team. From Lockheed. Build.

20:04 The first prototype US fighter jet. Named the Lulu Bell. In one hundred and forty three days, start to finish. This is just

20:15 Wild for years. The US had been working on this technology. And they hadn't gotten it operationalized. The Germans beat them to it. And then in a hundred and forty three days. Kelly and Lockheed go from zero

20:29 To flying. Prototype. Wow. Crazy. What a testament to him and to this organization in the circus tent that he has built.

20:38 The skunk works. 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.

20:52 Don't do something that's not your core competency. AKA doesn't make the beer taste better or make the plane fly faster. Exactly. And outsource everything else. And if you only have 180 days to do it, you are not going to become an engine manufacturing company. You are going to look around and say, 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 H one B Goblin engine, and that is what they put in this prototype. Yes. This prototype, the Lulu Bell, would go on to become the P eighty shooting star.

21:27 Lockheed would ultimately make about two thousand of them, and And while they weren't really used in World War Two,'cause the war ended, they would be used in Korea And it would be the first jet fighter plane in the US military. You raise a really important point though that we didn't cover earlier about Lockheed.

21:42 And skunk works. They are not. Engine manufacturers. all of the engines that were going into the planes before, during, since they're getting from other companies.

21:53 And that is true across the aerospace industry. That's interesting that the value chain evolved this way where basically no aircraft manufacturers to this day make their own engines. In 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

22:17 Amazing feed. Building What becomes the P eighty shooting star. And the US is first. Jet fighter plane in less than six months.

22:26 This is the beginning. Oskworks and Kelly realizes. Hey, this is something. pretty special here. So I want to read a a little quote from the Skunk Works book. That

22:36 Primitive Skunkworks operation set the standards for what followed. The project was highly secret. Very high priority and time was of the essence. The air corps had cooperated to meet all of Kelly's needs. And then got

22:50 out of his way. And boy. Did they? Deliver. So the P A D would eventually give way to the F one oh four Starfighter, which was another invention from Kelly and the team.

23:01 Kelly would win the Collier trophy for this. So After The war. Kelly says

23:07 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 As it doesn't take too much money.

23:21 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 Skunk Works operation because you can sort of Get around management's IR and management's need to report to shareholders and things like that.

23:44 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

24:00 In building eighty two. This is A building. On the Lockheed. campus which is right next

24:07 to the Burbank municipal Airport. It's an unmarked building. Literally like this is a commercial airport that average people are taking off of every single day. So then it continues. Those guys brainstormed what if questions about the future needs of commercial and military aircraft. And if one of their ideas resulted in a contract to build an experimental prototype, Kelly borrow the best people he could find in the main plant to get the job done. That way the overhead was kept low and the financial risks to the company stayed small.

24:37 His small group were all young and high spirited, who thought nothing of working out of a phone booth, if necessary, as long as they were designing and building. Airplanes. All that mattered to Kelly was Was our proximity to the production. Floor.

24:52 A stone's throw was too far away. He wanted us, the engineers and designers, only steps away from the shop workers to make quick structural or parts changes. Yes, I love this. I think this is a huge learning. keeping your designers as close as possible to production so the game of telephone is as short as possible. It is incredibly valuable. And having the designers being able to glance up at their desk and see like literally the way things are being manufactured, so they can say, Oh, that looked good in the diagram, but in practice, you have to bring this big thing around over here. Maybe we can make that better the next time we design it. It's just such a great key insight.

25:31 The other thing on the small number of people. This gets to the Skunk Works rules. And Kelly created this incredible document, 14 rules. that we'll link to in the show notes. Oh yeah. the third of which I mean they're all incredible, the third of which really applies here.

25:46 And I quote. The number of people having any connection with the project must be restricted in an almost vicious manner. Use a small number of good people. Ten percent to twenty five percent compared to the so-called normal systems. These people should all be together, all of them building relationships, collaborating, working together to produce the very best product.

26:08 And you see this in products in the future too, the iPhone, the iPod. I mean, you read the stories about the early teams there are six, eight, ten people. They're all full stack. So there's these unicorns that cross disciplines, and they're 10 X, 100X engineers. So You really only need a handful of really good people. All right listeners. Now is a great time to talk about a new partner of ours here on Acquired, Lagora.

26:33 The agentic operating system that is redefining how the world's best legal teams work. Yep. It's sort of obvious that AI is gonna completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Lagora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry? So the founders did exactly what great founders do. operate with obsessive customer focus. They embedded inside a massive law firm for months.

27:06 They sat with the lawyers just watching how the work really gets done. And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Lagora's Bet Here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work. and do higher value work. And this means that the pie can grow even as each individual task takes less time. And they recently launched Lagora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required. And Lagora works where you already work. You can use it within Microsoft Word while redlining or drafting.

27:59 The early Lagora numbers essentially speak for themselves. When they have a head to head pilot with their top competitor, they win seventy percent of the time. Legora now has over a hundred thousand lawyers on the platform from twelve hundred legal teams in fifty countries. And crazily, they went from one million

28:21 Eighteen months. truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in house at a company,

28:41 You can learn more at Lagora.com slash acquired And just tell'em that Ben and David sent you. All right, David, so what makes skunkworks work? Well, to start. All that mattered. Literally the only thing.

28:56 That matters. Is rapid. Delivery. Of superior. Products.

29:01 And that was driven by the expedient requirements of World War Two. Literally saving America and 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.

29:14 Isn't All that matters in Any business? Rapid delivery of superior products. Like why is this New and unique and different.

29:23 The reality though is that that's almost never the case. There's politics There's personalities. Well, and you rarely have an existential threat that you must cut through all the red tape. It's like Operation Warp Speed, the way that we got the vaccines as fast as we did. If the world is on the line. What can you do away with in your processes and which people can you hand select?

29:45 Competition and existential competition. Kinda has a way of bringing out the best in people. So Ben, you already talked about rule three. I wanna Did we pick the same ones? I'm so curious. We got fourteen 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?

30:03 The next one I want to talk about is The Skunk Works manager must be delegated practically complete control of his program. In all. Aspects. Yeah. I mean, this is like the autor 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.

30:24 He's the program manager for any given program that they're working on, any new aircraft. And also he's the guy flying to Washington to interface with the government. It's not like he's Dealing with the engineers and then calling the sales force and being like, Hey, can you go to a steak dinner with our guy at in Washington? No, it's Kelly. And yet it's most productive.

30:42 Skunk Works, I think was about maybe fifty 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 was one of mine too.

30:57 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.

31:12 In the main plant. They give raises on the basis of the more people supervised. I give raises to the guy who supervises the least. That means he's doing more and taking more responsibility. But most executives don't think like that at all. They're empire builders. This is so important.

31:30 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

31:43 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

31:56 I think the reason this was taken for granted for like all of Skunkwork's heyday was You know, hey, the mission here is preserving your life and the lives of your loved ones and America from losing World War Two and then, you know, having nuclear bombs dropped on it by the Soviet Union. You don't really need a lot of extra cajoling or motivation here. Totally. And you gotta think back. This was a time where American superiority was not guaranteed. I think we have

32:22 a reasonable amount of complacency today. Americans feel very secure. Sure there are enemies, but are we gonna be fine? Totally. We don't need to think about this that much. We can decide to prioritize other things and have passions and say, yeah, other people can take care of the national good'cause like it we'll be fine either way. That was not the belief at the time. No, there's this great quote in Skunkworks where Ben Rich tells the story of his first day.

32:46 In Skunkworks where he's shown the U two prototype. We're going to talk all about the U two 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

33:00 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.

33:19 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.

33:32 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.

33:44 Skunkworks addresses that. with the P eighty 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.

33:59 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.

34:11 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.

34:27 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, that an Iron Curtain has descended over Europe in the form of the Soviet Union.

34:41 And then before the end of the decade, I didn't really realize the timeline on this, in August nineteen forty nine. The Soviet Union detonates its first nuclear bomb. And Nobody believed that They were gonna have

34:55 The bomb. That quickly or that powerfully. And not only did they Have the bomb, but Whether this was real or not or positioning.

35:04 People really believe that the Soviets and Khrushchev's intention is Is to use the bomb against America. If they ever believe that they could do so without fear of retaliation, that they could knock us out first, that they would Do a first strike.

35:21 And use nuclear weapons on America. And this kicks off the Cold War arms race and people probably know and learn about mutually assured destruction and deterrence. This really was the policy of the military and the American government that we need to have capabilities.

35:37 To deter the Soviet Union from launching a first nuclear strike against us. by being able to guarantee And have them know that we guarantee that if they do so We will destroy them. So they can't do this. Because if they do, they will be destroyed. That was the whole policy. And that's like a really scary place to be.

35:58 This is like If somebody over there in the Kremlin decides one day That they think they can win, we're all gonna die. Right. In nineteen fifty five

36:09 There was a national poll. That asked the question What do you think you are most likely to die from? And over half of America. responded that they thought they were most likely to die in thermonuclear war.

36:24 Wow, above any other cause. Let that sink in. Over half of the country thought they were gonna die in nuclear war. Horrifying. And so In a war of perception, intelligence is paramount. Bingo.

36:38 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

36:54 The use of weapons. But the intelligence about the existence and positioning. And nobody Is better suited.

37:04 than skunkworks. To be the US. Government and militaries. Primary sounds cliche to say, but sword and shield during this war. Yes.

37:14 So this brings us to the U two spy plane. And This plane serves such an important purpose that ended up being Brought into service in nineteen fifty five. and was only decommissioned in nineteen eighty nine.

37:28 Yeah, incredible. Now there are many airplane programs that have ten, twenty, twenty five year time frames. For very different reasons. Yes, that we will talk about in the military industrial complex. But the U two 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

37:50 It would be really great if you know you could fly a plane over Russia and take pictures and understand all this.'Cause there's no satellites yet. Oh, well are there satellites? Oh we'll talk about that a little later. But you can't just fly a plane into Russia and do that. It's a closed country. The Russians are gonna shoot you down if you do it. We're not technically at war, so it would violate international treaties to go into their airspace. We would start the war by doing that. Exactly. So the first thing. It's funny, you know, it's got it in the news now that China's doing this now. The first thing we try is unmanned spy balloons. We send balloons over Russia. Failed weather experiments. Yeah, failed weather experiments. Yeah. That fails on many fronts, including

38:26 Actually. returning usable photos of Soviet nuclear installations. So Really it becomes clear that what's required

38:35 Is an entirely new type of airplane. They're Either do one of two things, and ideally both. Fly over Russia. Stealthily and undetected by radar.

38:46 Or two. fly high enough or fast enough that they can't shoot it down even if they do. And so Skunkworks 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

39:08 Great, so let's do that. Yeah. So this is interesting. What government agency contracts them to do this?

39:15 It's not the military. We're in the spy game now. It's not the army, not the navy, not the air force. It's the CIA. They are building their own air capabilities and all of the work that Skunkworks does here and for many years to come is for the CIA. Yep.

39:30 So What exactly is the challenge that Skunkworks has laid out in front of them for designing this new spy plane. Well At the time, the maximum altitude that airplanes flew was about forty thousand feet.

39:44 The US thought that the Soviet's best interceptor fighter aircraft could get to about forty five thousand feet. Yep. And we also thought that their radar wouldn't function above like fifty five thousand, right? We were like, All right, as long as we clear sixty five thousand, we should The higher than their radar could even detect, and certainly higher than their fighters could come get us. Right. So the CIA's spec for Skunkworks.

40:09 for the U two is to fly at seventy thousand feet. Now There are a couple problems with that. is that normal jet fuel doesn't work at that altitude. You know, at that altitude

40:22 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 uh 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.

40:42 Problem number two is maybe a little bigger, and that is that humans cannot survive at that altitude. So certainly you need a pressurized cabin. But if something were to happen and you needed to be out of the cabin, you know. Cold, no air, blah blah blah. Yeah, and I don't know the technical details, but

41:00 I think even the cabin pressurization technology that existed then Was not gonna cut it at seventy thousand 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

41:19 The space suit. And that's what they put these pilots in. Wow. So Lockheed and Skunkworks.

41:26 Win the contract. On the CIA. They start working on this plane. In sometime in nineteen fifty three. Incredibly top secret.

41:34 we wouldn't reveal the fact that this existed to the Russians, our own people, for years and years and years. I mean, this is like the quote from earlier that we read from Ben Rich when he started working on this project day one. And saw the prototype. And then it hit him like a sack of cement, you know, how important this was. So skunk works. Completes.

41:54 And delivers the plane. By July nineteen fifty five. 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.

42:07 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.

42:17 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 in space suits for the first time. Feels like to be a reconnaissance aircraft, you would also need one other

42:33 In order to achieve the mission. Of Spying on the enemy. Yeah, to take photos you need a camera. Indeed.

42:41 And you would need an all new type of camera with all new type of lens. capable of taking photographs something seventy thousand feet away from you through you know, a whole bunch of atmosphere. Gosh. If only the US had someone who was just incredible at this sort of pioneering

43:01 Optics technology. Indeed the US did. And that was Dr. Edwin Land. And the Polaroid company. Who subcontracted and created all of that. And actually I believe it was Edwin Land himself That helped convince President Eisenhower to even pursue this project in the first place. He was like, We can build the camera that can do this.

43:20 If we can get the airplane built. We can do this project. This blew my mind. It is so cool to see the intersections of different innovators throughout history. I mean Edwin Land is the man who inspired Steve Jobs. And he's building the U twos.

43:35 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 gotta test this thing. They're not gonna roll it on the runway in Burbank and take off and uh you know just head for the Soviet Union. You gotta test it and uh you know, it's gotta be secret and whatnot.

43:56 And remember, Kelly Johnson, one of his big principles is like we test our products. You the government don't test our products. We test our products. And we should be clear, this U two spy plane looks Crazy. It has a hundred foot wingspan. Yeah. This thing, if you saw it taking off,

44:11 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.

44:35 So they need to find a suitable test site. They go scouting all across the western US and kind of remote. Kelly Johnson is sort of like Sam Walton in his prop play and scouting out for, you know, Walmart locations. Flying sideways. And then they get an idea.

44:50 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

45:04 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.

45:22 And there's quote. Kelly Johnson here about this in the book. We flew over it, and within thirty 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.

45:37 So we wheeled around. Landed on that lake. Taxied up to one end of it. It was a perfect natural landing field, as smooth as a billiard table. Without anything being done to it.

45:49 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 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,

46:09 I believe that nuclear testing continued right nearby while they're using this site. Grim Lake two. Test Do you two? A hundred percent. It's the craziest thing. They had to like sometimes take some time between the most recent nuclear test and when they wanted to go fly, cause these sites are like

46:28 I don't know, twelve miles away from each other or something pretty close. If you're curious, listeners, there's this great uh 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.

46:54 This is area fifty one. Skunk Works creates area fifty one. 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. It's all goodness for Skunkworks, this cover is great. Oh, it's even better than that.

47:16 I can't remember which plane and w or when this was. But at one point in time the one of the test flights crashed. And you have the pilot survived and like somebody saw him. He was wearing a space suit. Nobody knew what a space suit was. Of course he looked like a freaking alien. Right. It would be another ten years before we would have the moon missions.

47:35 Yeah. It's so funny. Amazing. Yeah, it's all skunk works in the U two. Wow. And then The Blackbird and everything else we're gonna get into later in the story. All happening out of Area Fifth.

47:49 The prep work that the pilots had to go through before getting on these planes, too, were nuts. They needed to breathe pure oxygen for two hours. to remove all the nitrogen from their blood in case they had to eject. Cause 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 Skunkworks programs into the world.

48:18 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's scuba dived and you can't fly right afterwards. From Ejecting. And so

48:30 It's like well, if you manage to get out of the aircraft before it crashed then that could kill you. So you needed to make sure that this sort of oxygenating of your blood and getting rid of all the nitrogen made it so that if you did need to eject, then you would survive this as well. Yeah. Crazy.

48:46 Okay. So they test the U two at area fifty one. 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.

48:58 Within a year. The first Soviet Union overflight happens. On July fourth. Nineteen.

49:06 Fifty. Six. Of course it was. Of course, it was July 4th. Now, this is so interesting. There's a whole bunch of things that happen when they take out. Like, they don't know what's going to happen. Is this thing gonna work? Are the Soviets gonna see us? Like, we're gonna learn so much here. You can't script this stuff. The Soviets.

49:21 Tracked it. On radar. Even at seventy thousand feet. The whole way. The whole way. Right from it takes off the whole flight path through

49:28 Russia They knew everything. Yeah. We were doing. We were super wrong about their

49:34 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.

49:50 They track the U two the whole way. This whole top secret program, like, oh no, it's busted. They see it. But it turns out They can't hit it. So

49:59 You know, a whole bunch of fighter jets scramble and the fighter jets they can't get up that high, so they can't intercept it. They launch surface to air missiles, the missiles can't hit anything that high up. So the U two just flies along. They're tracking it the whole way. There's planes flying along behind it and they can't do anything. But at least we get the intel now in the US 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.

50:25 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

50:35 In that flight, we get incredible photographic observational evidence and we would fly so many missions Over Russia for the next few years. Getting this incredible intelligence. The Soviets never say anything.

50:48 Because if they were to say anything and say that they tracked us into it. Then they would be admitting That they were powerless to stop it. This war of perception, like it's so crazy the incentives and motivations here, but it makes sense. They're not gonna say anything and reveal the program. So it remains top secret.

51:05 Because if they did, their sort of position and posturing of strength wouldn't be compromised. And neither country really wants to be at war, so we're both maintaining this uh 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, uh other countries. That we're not at war with the adversary. Right. And I actually think there may be, you know, military historians that

51:34 understand this better than us, but I think this was actually an optimal outcome for the US. 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.

51:49 And so this, the U 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.

52:01 But nobody talks about it. The other crazy thing is this camera is incredible. If you look up photos taken by the U two spy plane, it is remarkable what in the mid fifties this thing was capable of taking photographs of from seventy thousand feet. The engineering all around that went into this is Justin C mean, we 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

52:31 the Soviet Union's warheads, the Soviet Union's fighter jets, the capabilities that they have with their radar because it's painting our airplane, so we now know that that exists. Mission accomplished in spades on this thing. We talked earlier about the cost of three and a half million dollars. I think you could make an analogy to like the Louisiana purchase in terms of like best deals that the United States government ever got relative to like the benefit to America. This is huge. Arguably the last great deal they got from Lockheed Martin, but Well, no, there's some more that we're gonna talk about in a minute. So

53:05 This all continues. We fly dozens, maybe hundreds of U two missions over the next few years. The Russians are constantly trying to shoot them down, they fail, nobody says anything. And then On May first, nineteen sixty, ironically on May Day, we launched

53:20 The YouTube program on July fourth. And it ends, at least over the Soviet Union, on May Day. nineteen sixty. The Soviets finally have developed a missile. That can reach seventy thousand feet with accuracy and they shoot down.

53:35 A U two. This was the first time in history. That a ground to air missile had shot down An airplane. I didn't realise this. I read that. I was like, Oh wow, I guess maybe

53:45 The technology didn't exist during World War Two, uh the Korean War and um So this was a major historical moment in so many ways. America and the CIA and The government, the president, their way, they're like, Okay. Right. What do we do? America's posture is we were never there.

53:59 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 uh say something right away. Couple weeks go by.

54:13 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 seventy thousand feet.

54:36 Right. Probably the pilot was killed. Well, that's 14 miles in the air. Yeah. No The pilot was not killed.

54:47 The pilot's name was Francis E. Gary. Powers. Pilot powers. If you know anything about US history, you probably know his name.

54:54 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 U two program. So what happens? Turns out that there was a big summit in Paris scheduled. for later in May between Eisenhower and Khrushchev.

55:13 And Khrushchev. Announces on the eve. That they have captured an American pilot. They have.

55:21 Captured this new plane. that the US has been illegally And in a Provocatory manner. Flying over Soviet airspace.

55:29 They have defended their country and shot it down and this creates a Huge mess. Eisenhower first denies this. And then admits it when we realize that like oh shoot this pilot is still alive. He's confessed like, wow, this is a disaster.

55:44 Yeah. So but I guess there probably was a path where this could have led to escalation. Fortunately it does not. But it does mean that the U two program, at least over Russia, is Done. We don't fly any more U twos over Russia. We can't. I mean, if we were to do it at this point, we know they can see us.

56:02 They now can talk about that they can see us and they can shoot us down. Like it would escalate to war if we kept doing this. We have to stop. The U two 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?

56:20 We now have no way. of military sites in Russia'cause we can't fly planes over there anymore. Right. We're blind, what do we do?

56:30 What do we do? Well The world would not know. Until Nineteen ninety five. When this would all become.

56:38 Yeah. under the Clinton administration. But that was only true for about three months. Thanks to Another.

56:47 Super secretive. Lockheed. Division. Figured out another way. For us to take pictures.

56:54 Of the Soviet Union. Yes. And this listeners is where If you've read Skunk Works or watched documentaries about Skunk Works, What we're about to talk about is not in any of those.

57:05 This is a completely separate story that takes place in a different place in California. That is a detour from our Skunk Work story. And we'll be back. Because my God did Skunkworks do some incredible things after the U two. But before we do that. We want to take you to Northern California and the origins.

57:23 and Lockheed's participation in that. All right, listeners, now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF, then everyone would nod and you're done.

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59:13 That Ben and David sent you. 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.

59:27 But you sort of found the last twenty minutes and then just dug in like a splinter on this particular moment in history and how it is. All tied into 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. 'Cause 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 onto this was some of the chapters in Beyond the Horizons.

59:58 Even though that book was written in the late nineties. I started digging in and then I started watching some YouTube videos with some of the people involved in this and I was like, Oh my God. There is this incredible story here that we don't realize. Yes, in typical David Rosenthal fashion, you sent me a note the other day and said you have to listen to this starting at eight minutes and fifty seconds. And I'm like, What is this? And I click and it's a guy at a podium with a terrible recording setup.

1:00:26 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. Incredible. This stuff is buried. I honestly can't believe it, and I'm so glad that we get to tell it here. All right, let's set the context.

1:00:45 So if we rewind back to World War Two. One thing we kinda mentioned here now as we were talking about the U two and the Russians tracking it on radar, but we didn't talk about during Well, two. was the importance of radar. Now so much of World War Two was an air war.

1:01:03 Both in Europe and then especially in the Pacific. And the development of both radar and anti radar technologies was paramount in the war efforts. Yes, there was lots of land based fighting and tanks and all that stuff, but World War Two was the first real air war. And Obviously that importance of radar continued into the Cold War, just like we were talking about with U two flights.

1:01:26 Now. During World War Two. Where was all of the US an allied? radar work and research being done. It was primarily

1:01:36 being done out of two institutions in Boston. M I T. With the radiation laboratory or the Rad Lab. And Harvard.

1:01:46 With the Harvard radio Research laboratory. Now here's what's interesting. Neither of these two labs at MIT and Harvard existed before the war. The government directed MIT and Harvard to set them up.

1:01:59 As part of the war effort. They didn't exist before and then MIT and Harvard. Very fortunately for California and Silicon Valley, shut them down. after the war. Now

1:02:11 It turns out That the head of the Harvard Lab Determine. Might ring some bells for people, especially people who went to Stanford.

1:02:21 Termine. was probably the world's leading expert on radio engineering and also vacuum tubes and early computing. Except Termin. wasn't actually a Harvard professor. Terman was a Stanford professor. He was just on loan to Harvard during the war years.

1:02:40 Because that's where the government set up. The radio labs. And the government allocated millions and millions of dollars of funding to Harvard and MIT and something like fifty thousand dollars to Stanford. All of the funding for this was Harvard and MIT. Yes, they assembled all of the world's experts and Terman was

1:02:57 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

1:03:11 'Cause Harvard shut down the lab. He comes back to Stanford. And he does three things. First.

1:03:19 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.

1:03:41 Yes, of the highest order. So that's one. Two. Soon after he gets back to Stanford, he becomes the Provost. Of the entire university.

1:03:51 And as provost He completely changes the way tech transfer is done at Stanford. No other university has As good of a tech transfer policy as Stanford. They're notoriously friendly. Yeah, notoriously friendly and everywhere else.

1:04:05 Including Harvard, MIT, Princeton, blah blah blah, are notoriously unfriendly and hard to work with. The classic story is Stanford owned one percent of Google at Spin Out, which ended up making them an ungodly amount of money because of how big Google became. And if that were at other universities, they would have said fifty percent is what we need to keep, or thirty three percent is what we need to keep, and they would have smothered the innovation before it could become commercially viable. Now I sort of in the back of my mind knew this because I had watched Steve Blank's talk many years ago. But I kinda forgotten. I just thought I was like, Oh, well that'cause'cause Stanford and Silicon Valley, like we get it. We're smart. Not that we're smarter, but there's this attitude of You know, if you're in Silicon Valley, even to this day, you're like

1:04:45 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.

1:05:07 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 He encourages Students and professors To leave Stanford and go set up companies and work for defense firms and work for the military.

1:05:23 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

1:05:44 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. Mm-hmm. 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. Oh, it would have been career suicide in academia to do this.

1:06:12 Instead, at Stanford, it becomes the best thing you can do for your career. Because in Terman's mind, it's the best thing you can do for your country. Okay. So that was number two. Number three. He carves off. A big part of the Stanford campus. Now, if you've ever been to the Stanford campus.

1:06:29 My God, I was so lucky to spend two years there. It's like paved in gold. It's literally Shangri La. They have so much land. It's the most beautiful, like idyllic place in the world. And like eighty percent of the land is still undeveloped. Yeah. They own like all the way out to the ocean, I think. Like it's crazy. So he carves off a part of the Stanford campus.

1:06:47 And develops it. To be leased out as commercial space. to corporations and the government. to come people to start companies, companies to come to build to participate on this. Ecosystem all right there on campus.

1:07:01 It's initially called the Stanford Industrial Park. Today it's called the Stanford Research Park. It still exists. If you've ever been there. It's basically all of the office buildings up and down Page Mill Road. In

1:07:13 Palo Alto. So It's H P in Hewlett Packard. We'll talk about that in a minute. It's Tesla's landlord today. It's VMware. It's where Xerox Park was. It's where Next was in Steve Jobs. It's where Facebook's office was for a while. This is where Theranos was. My God. So you might be like listening like, Well, this is cool. Maybe I knew this stuff, maybe I didn't. This is really fun Silicon Valley history. What does this have to do with Lockheed?

1:07:37 Well One of the very first tenants. Of Stanford Industrial Park. Then you were talking about Customers. Customer.

1:07:47 Who would go on to become the single largest employer. In The area in Proto Silicon Valley. By a huge margin.

1:07:59 Secret. Division. Of it. This blew my mind. This secret division is called the Lockheed.

1:08:06 Missile systems division. Later to be renamed. The Lockheed missiles and space. Company. And what?

1:08:15 LMSC, Lockheed Missiles and Space Company did. I honestly think like it is Bigger impact. to the country, to the world, and certainly on business to Lockheed and to Silicon Valley, then Skunkworks. This story is.

1:08:28 Of a scale. I don't know that we've ever really told on acquire. There are a lot of Skunk Works devotees, David. That is quite the assertion to say that this is a bigger deal. Well, let's talk about it. Listeners, you can judge. They patterned themselves after Skunkworks and took so many.

1:08:43 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. Well, there's a reason for that. Okay. So Lockheed makes the decision to start this new missile systems division in nineteen fifty four.

1:09:02 But it becomes so much more than that. Obviously, this is also top secret stuff, just like Skunkworks. So just like skunkworks. They set up the new missiles division. In Burbank.

1:09:14 Also in an unmarked building. They literally just copy paste Skunkworks right there in Burbank. And so it starts in southern California. It does. But There's two problems with that. First.

1:09:26 It's kinda unwieldy. For a Big company like Lockheed. To have not one. But two.

1:09:32 Super secret unmarked. Divisions right there on the main campus. You know, that aren't supposed to know about each other or anything else going on. Like you start getting into weird territory quickly. But it's important that The missile division did start there because they took, as I said, a lot of Skunkworks management practices.

1:09:49 The bigger problem Is that it turns out that building missiles is a very different discipline. than building airplanes. Because

1:09:59 Unlike airplanes, you don't have a pilot in The missiles. So you need missiles. Guidance systems. And that means That you need radar.

1:10:10 And you need Computing. And those two things are not what Southern California is good at. Hmm. But you know what's really good at those things? Fred Turman.

1:10:20 Up at Stanford. And everybody that he's recruited, literally the best minds in the world at all of that. who are now at Stanford and who are now being encouraged To go spin out. And start companies who might just be subcontractors.

1:10:32 To a big missile system that you're trying to build. Uh 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 nineteen fifty five.

1:10:45 Lockheed moves the missile systems division. Out of Burbank. And up one oh one. Industrial.

1:10:54 Park. The very same Stanford Industrial Park. That Fred Terman just carved out of the Stanford campus. And developed. On Page Mill Road. And

1:11:04 Lucky'd. One of the very first and biggest Tenants. of the Stanford now research park and is still there.

1:11:12 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.

1:11:21 So Lockheed pretty quickly after they establish themselves in Palo Alto. They also buy Two hundred and seventy five acres.

1:11:30 Just down the road in Sunnyvale. And they build a huge campus there, a hundred and thirty seven buildings. So when Lockheed buys this. The population of Sunnyvale is less than ten thousand people. What? Lockheed built

1:11:44 Sunnyvale. I didn't realize that. Wow. So how many people would eventually work in Sunny Vail at Lockheed? So

1:11:53 By the End of the decade in nineteen fifty nine, just four years later. Lockheed Missile Systems employs almost twenty thousand people. In Palo Alto and Sunnyvale. And a few years later, by the mid sixties, they would employ thirty thousand people.

1:12:09 This makes Lockheed. By far. the largest employer In this brand new proto Silicon Valley. I mean, remember, I just said Lockheed built Sunnyvale. You think of Sunnyvale, Silicon Valley today, like Yahoo and Intel and all that. Cisco. There was none of that.

1:12:25 Lockheed built it. So Hewlett Packard was the largest tech company, computing company, you know, Silicon Valley company at the time. Hewlett and Packard were

1:12:35 Students of Fred Turman and Fred encouraged them to spin out and start Hewlett Packard. They were the largest new tech company. They only had three thousand people. One, two, three. Lockheed had thirty. Thousand people. Wow. Oh my god.

1:12:51 Funny story, I knew at least as of 2009, that the Lockheed campus in Sunnyvale was large because when I was interning at Cisco, I went on a run one morning and I was just sort of like exploring around and I ran into uh 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 um Dissembled. It's not there anymore. But yeah, you need a like big

1:13:21 hangar that 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 nineteen fifty five. 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

1:13:48 They've got Terman's radio background. But there really weren't any people with compute experience yet. That was all happening concurrently all around them in Sunnyvale and Palo Alto. So We talked about this a bunch actually on the first Sequoia Capital episode when we were telling Don Valentine's story. And at the time when we were telling the story, we'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.

1:14:19 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.

1:14:30 Yes. Now he was also selling around the country to other defense contractors too. Lockheed wasn't the only company that was working on missiles. But I think they were the only one that was working on missiles in Silicon Valley. Wow. And by God, did they buy a lot. of product out of all these startups.

1:14:47 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.

1:15:01 in Silicon Valley than at HP in the late fifties. Yes, it is totally insane. And So many people came. Through.

1:15:10 Lockheed into Silicon Valley. Including One Jerry Wozniak. Uh

1:15:18 Moved himself and his young family. Out. Two This new Silicon Valley To become an engineer.

1:15:26 That's Lockheed Miss Space Company. That's right. Waz is dad. The reason that Steve Wozniak grew up in Silicon Valley is Is directly.

1:15:36 Because of Lackhead Martin. Oh, that is awesome. No Lockheed, no Waz in Silicon Valley, no Apple. No Apple. Crazy.

1:15:45 Not to mention there's a really Interesting. point here, which is you wouldn't have this open commercial Spirit.

1:15:54 to Silicon Valley. without Determine 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.

1:16:14 And it's worth pointing out for people who don't spend a lot of time in the Bay Area, this has Absolutely nothing to do with San Francisco. Nowadays it's sort of this big blended soup of companies that have offices in both places and you can drive or take the Tacao 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.

1:16:38 Yeah. And before this time, before the fifties. There was no silicon. It was called the Valley of Heart's Delight. That was the name for it. It wasn't Silicon Valley. Huh. Wild.

1:16:49 Okay. So What was Lockheed actually doing there? We talked about them working on intercontinental ballistic missiles, I CBMs and Missile defense systems. I I think they probably did continue to work on that.

1:17:00 But there were two projects that this new Division of La Keed. Took on. That really changed history. And

1:17:09 Both of them together. became For Lockheed, at least. And the parent company. By far the biggest driver of

1:17:18 profits for the coming decades. And really, as we'll see, This division, you know, not Skunkworks, this division kept Lockheed alive. Lockheed would have absolutely died. without this division. So what were these projects? One.

1:17:33 Went up. To space. That's perhaps a Obvious and we've foreshadowed and literally is in the name of the company, the Lockheed to Missiles in Space. Corporation.

1:17:42 And the other one. Went down. Under So let's talk about That one first,'cause I think it happened first, chronologically.

1:17:51 So Submarines. Had obviously been a thing since World War Two and even before that, back to World War One. There's lots of advantages to submarines during wartime. They're stealthy. They can basically travel anywhere in the world.

1:18:07 You can stay hidden for long periods of time, especially once nuclear submarines are developed that can stay underwater for months at a time, self-powered. They're both a great offensive and a great defensive weapon during periods of active war. But during the Cold War They're kinda useless because If you wanted to have a chess piece in position to strike a land based

1:18:30 Target. If you could even do that at all with a submarine, you gotta get the submarine pretty dang close to the land, which means close to Russia, which means they know you're there and that's a provocation. Hm. Unless. Somebody.

1:18:45 Could maybe somehow Figure out a way. To fire. An intercontinental ballistic missile. out of a submarine.

1:18:53 And go up into you know the air and into space and then hit a land based target. Far, far away. Crazy. It's hard enough to make this happen from the ground.

1:19:04 You're talking about doing this from the sea with all the like waves and the lack of stability. No way this could happen. This thing has to thrust through air after it thrusts through water. Oh, well you're making the leap already that you would fire it underwater. At first, when the Navy contracts Lockheed to work on this, In nineteen fifty five.

1:19:23 The Navy's fleet ballistic missile system, its FBM. The idea is they're gonna fire these things from the surface of the ocean. The submarines gonna rise up and they're gonna like stabilize it in water and then they're gonna fire off A missile from the deck of a ship or a surface submarine. You could imagine another issue, which is these things have rockets on them. So you have to not destroy the launch pad, which is the submarine full of American humans. While launching it.

1:19:51 Yeah. This is a big challenge. The reason. That it was worth trying. Was that If you could

1:19:59 create a naval based Intercontinental nuclear strike. Capability. It completely changes the strategic landscap of deterrence and first strike versus second strike and retaliation.

1:20:13 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

1:20:29 nuclear capabilities. If they could target all of our land base. I C BMs. Incapacitate them, then we will be Incapable of responding.

1:20:40 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.

1:20:50 Well, that completely changes the chessboard. It's quite the deterrent. Quite the deterrent. Pretty much guarantee. As long as you can keep a fleet of nuclear submarines operating at all times. That you can't take them out.

1:21:03 And they can move around and be anywhere. And so if you launch a strike. They're gonna launch right back and first strike is now off the table. This is a huge Strategic win, if you could put this.

1:21:15 Actually operationally in practice. The other medium, if you will, location. That could change the dimension too for doing this. Would of course be space. If you had nuclear missiles up in space,

1:21:29 That also changes the dimension, and this among many, many reasons. Is why When the Soviet Union launches Sputnik. into space in October nineteen fifty seven. Even though Sputnik itself was far from

1:21:43 Having nuclear The Soviets getting to space first was truly terrifying. I can't imagine how disconcerting it is in an era that You know, now there are tens of thousands of satellites orbiting the earth all the time.

1:21:56 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 C. It turned out, like we were talking about a minute ago, with the Firing.

1:22:10 I C BMs 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.

1:22:23 And Lockheed did it. with the help of Silicon Valley. So in December nineteen fifty five, the Navy Awards this contract to Lockheed. The name of the project.

1:22:34 was Polaris. People of Polaris missiles. Just over four years later, after the contract is awarded. In nineteen sixty. The very first

1:22:44 US nuclear ballistic missile equipped submarine sets sail on its patrol and everything we just talked about. is operationalized, equipped with Lockheed. Polaris A one. Undersea fired. nuclear warheads, ballistic missiles.

1:23:00 could reach land based targets up to twelve hundred nautical miles away from wherever the submarine was when it launched it. And it was all built out of Silicon Valley. With many subcontractors all over the place. Right. 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.

1:23:29 I think a lot of this work was done out of Sandia, which we talked about in the Amazon episode. Oh yeah, Bezos' dad worked there, right? Uh grandfather. Bezos' grandfather was the head of Sandia, which was in New Mexico. The military nuclear program. the division of the US overall nuclear program. Think was out of Los Alamos.

1:23:49 But Sandia was the military arm of it. Which weirdly Lockheed for many years actually had a contract to manage Sandia because there's some sort of strange partnership that happens where the federal government hires government contractors to manage national labs. Yeah. To enable this strategic chess piece.

1:24:09 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.

1:24:26 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.

1:24:38 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.

1:24:47 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.

1:25:04 That prevented it from being used. If we hadn't built this stuff. There's a good chance Russia would have done a first strike. Yeah. It's crazy.

1:25:13 Okay, so Lockheed after four years successfully does the underwater I C B M launch. Yes. And then that quickly leads to more successor programs and developing the technology further.

1:25:27 The Polaris becomes the Poseidon is the next program, and then the Trident. The Trident missile. had a five thousand mile range. Uh. Carry up.

1:25:39 Hugely destructive nuclear payload. Unbelievable. Terrifying. All right. So

1:25:45 We just told this incredible story. About LMSC Taking Silicon Valley.

1:25:52 Under the ocean. This program, you know, Polaris, Poseidon, Trident. For most people listening, especially if you're American. These names aren't surprising to you. You've heard of these programs. You are aware that

1:26:06 the US starting in the nineteen sixties. had nuclear submarines carrying intercontinental ballistic missiles. Yep. It was If you think back to the kind of the test game.

1:26:18 It was in The government's best interest for the Soviets to know. That we had these. The point was deterrence. In fact, we probably should have bragged about this even if it wasn't real.

1:26:30 Right. Maybe it wasn't. Who knows? We should have had inflatable subs floating around that we thought were uh nuclear. Maybe it's all the cover. Maybe all the money that went into Silicon Valley. No, I don't think that was the case. Either way, you don't want to find out. Speaking of cover, do you know about the things we did on top of the factories when we were building airplanes? Oh yes. And Disney was involved. Yeah, starting way back in World War Two, but I think continuing after that. in the Burbank facilities at Lockheed, I know of Boeing in the Seattle area and I and other places too. Built basically these

1:27:02 burlap cities on top of factories that looked like suburbs complete with three D 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 I'm pretty sure that Disney Imagineering was involved in creating these sets like they made for Disneyland.

1:27:33 It's crazy how sometimes it's in our best interest to to make the adversary aware of our capabilities and sometimes we want disguise capabilities. It's really interesting. Super interesting. Okay. So If you remember back when we pressed pause on the Skunk Orc story and

1:27:50 moved up the state of California up the coast too. Silicon Valley. Oh, we said that when Gary Powers and the U two was shot down in May nineteen sixty. That Supposedly.

1:28:01 This was the end of US observational Capabilities. Yeah. The Soviet Union. And that it was for about three months. But nobody knew it.

1:28:11 Well LMSC. Is the reason. That we got. Our eyes back in the sky.

1:28:19 And you might know that eventually after the U two Skunkworks would create. the next great spy plane, the SR seventy one, 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

1:28:41 This is heretical to say'cause it's so beloved. But I think the Blackbird. Was a decoy. We were getting everything we needed from space. Uh we just didn't want anybody to know about it. And so everybody's now is like, Oh, the Blackbird, it's such a shame the government shut it down, you know, it was never used to its potential.

1:28:59 Kinda 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 raised. I know. I'm getting mad over here. People are probably getting very mad. Here we go.

1:29:13 So when you think about America and space. in the US space program. You think of course about NASA. Gemini and Apollo. Mercury Kennedy putting a man on the moon.

1:29:25 All that. Amazing stuff. Which for sure happened to And what's happening. All of that

1:29:32 was basic science research. Nobody working on those programs public observing it like It would be crazy to think there were gonna be actual

1:29:43 applications in space. Anytime. There's no infrastructure like these are science missions. This is research. And even, you know, Sputnik on the Russian side. Sputnik was a research best way. It was like the size of I don't know, like a bowling ball or so. I think it was a little bigger, but like it was

1:29:59 Very, very simple. It was a Long, long, long, long time. before you went from Those initial science missions to

1:30:09 applications in space. Or so everybody thought. Because in parallel There was a secret. U S. Space program.

1:30:19 Being run. By Lockheed missiles in space. Corporation. out of Silicon Valley. And

1:30:27 In basically the same time frame as the initial NASA missions. The initial Mercury, I think were the first missions. Mercury, Gemini, Apollo, yep. Yeah. Basically concurrently with that. They got a fully operational Observational spy. Satellite system.

1:30:47 Up into space and functioning. At the same time. 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.

1:30:58 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. So The first program

1:31:18 was called Corona. And you should Google about it and read there's a great declassification document story. that the government put out in nineteen ninety five when they declassified this stuff and the Wikipedia page is pretty good. Yeah, I downloaded it and I have it open on my computer. It's pretty crazy.

1:31:36 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 Uh

1:31:46 CIA and the National Reconnaissance Office does. I think they write these stories Maybe quasi in real time. So that there's documentation of all this stuff and then they stamp it. Secret and then it never gets out until it gets declassified. Wow.

1:32:00 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.

1:32:19 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 uh Pentagon official that championed this program really liked.

1:32:32 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 nineteen sixty. It's built in the years.

1:32:42 leading up to that by LMSC and then went up in August nineteen sixty. While everything else happening in space was, you know. Research vessels. This first Corona satellite. had a camera system on it.

1:32:56 That was able to photograp Any ground location. That it passed over in its orbit around the Earth. At a resolution as low as five feet.

1:33:07 From space. These were a film. Systems. Now The U two camera system

1:33:14 did have a higher resolution than that, higher ground resolution. But five feet was still. Plenty good. And more importantly The corona system

1:33:25 Could take photos. Anywhere in the world on its orbit. And if you had multiple of these satellites up there, you know, you could pretty much blanket the earth, or at least everywhere you cared about. Pretty quickly. At basically any point in time. You know, they're spinning around the earth. Like, yes, you can't do it. in real, real time, but like it doesn't take that long for the thing to fly around the earth and then fly around again. Right.

1:33:47 The very first Corona mission. That very first satellite that went up in August nineteen sixty. produced greater photo coverage. of the Soviet Union. Then

1:33:58 All of the previous U two flights combined. Five years of operating the U two program. One satellite. In one kind of month long mission, I think it was about a month. Before it decayed, the orbit decayed.

1:34:10 Got more than all of that. Wow. No need to fly a plane. No need to worry about getting caught. No need to worry about the Soviets knowing what was going on. No need to worry about being shot down. Unbelievable.

1:34:21 There's a crazy stat, over eight hundred thousand images would be taken by these satellites over the course of the program. They got an enormous amount of coverage. No. You might be thinking as you're listening, you know, you're oh, I know how satellite and satellite imagery works today. You know, you got Google Maps, you got Starlink, you know, blah, blah, blah. Starlink's communication, but like Communication. Yeah. How did they beam These images down from the ground. These were not digital photography. This was film.

1:34:50 Freaking photograph. So You gotta get the film down from space, is my point. Which they literally did. And how did they do it? They dropped it. Okay, so that's the craziest thing. They

1:35:02 dropped from space a canister with film in it. Mind you, they can't mess up and expose the film and ruin it. This is very delicate film. They drop it. in a canister. From orbit.

1:35:16 It enters the atmosphere and during all the heat and everything. It's not like you just shove it out of the satellite. They had retro rockets built into the film canisters. Two. Reaccelerate. out of the orbit and move it down.

1:35:30 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. Yes. 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.

1:35:54 The heat shield. that surrounds the vehicle is jettisoned at around sixty thousand feet. So again, where the highest airplanes can start to fly. And parachutes would be deployed. Film canister. This is my favorite part. This is so good. Coming down.

1:36:10 With a parachute. The capsule is designed to be caught in midair by a passing airplane. Towing a claw. The claw grab the parachute and they use a winch

1:36:26 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 they had a freaking C one thirty flying around with a big ass claw to snatch this thing out of the sky. Unbelievable. You might say, what if the C one thirty, which by the way, Lockheed airplane that still flies today, the C one thirty J

1:36:46 What if the airplane misses it? Seems like that's a pretty reasonable probability when this thing's falling from space and you're trying to catch it with a moving object. It can land at sea. And there's sort of a self destruct mechanism where there's a salt plug in the base that dissolves after exactly two days. Which if

1:37:04 that happens, then the film sings forever to the bottom of the sea. So if the Navy can't retrieve it within forty eight hours, the salt sort of dissolves enough. Because obviously what would the biggest disaster be would be if somebody else or the Russians got their hands on this and were like Holy crap, somebody's taken photos from space of us. Right? The whole thing is genius, crazy, and absolutely insane that it actually worked.

1:37:29 I believe it wasn't just one C one thirty. I think they had a whole fleet of C one thirties all flying around where they thought this thing was gonna re enter the thing. How else are you I mean, when you have an a satellite orbiting the earth that fast at I don't know what it is, Mach twenty something. It's pretty hard to predict exactly where your tiny film canister is gonna come back and land. And all this. Happened in nineteen sixty. Oh my god.

1:37:55 So All told the Corona satellite program. And LMS C also designed the Agena rocket, which was the

1:38:02 kind of upper stage rocket booster that the Corona satellite and other satellites, feature satellites attached to. And I think they sort of pioneer the concept of a second stage. Like we need a first stage to get us up, and then we need a second stage to get us to a very particular orbit that we care a lot about being in. So That system of the corona and the Agena.

1:38:22 Was the first spacecraft in history to do Oh. Of the following things. Achieve a circular orbit.

1:38:30 Achieve a polar orbit. be stabilized on all three axes in orbit. be stabilized if you're gonna take photos at five foot resolution of the ground.

1:38:42 be controlled by a ground command. return a man made object from space. Propel itself from one orbit to another. By the way, they returned thirty nine thousand man made objects from space. They took two point one million feet. of film of photographs in thirty nine thousand cans.

1:39:03 I mean Any one of those things that I just mentioned, if this weren't a top secret black classified program for What three and a half decades. We'd be all over the history books and As is like nobody knows about this stuff.

1:39:16 Yeah. It's the first, obviously, mapping of Earth from space. It's this first stereoptical 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

1:39:33 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.

1:39:51 followed up the four stages that we know of first it was what they called see it. That was corona, just period, can we see? The Soviet Union from space. Corona proved that. The next phase was can we see it well?

1:40:05 And then the phase after that was can we see it all? And then the last phase, which is st a lot of the last phases still classified. is see it now. So let's talk about All of these. Corona, like we said, was just see it.

1:40:18 Get photos. But the photos were at a worse resolution than what the U two was able to achieve. In nineteen sixty three. Only three years after the first Corona satellite goes up.

1:40:32 LMSC and the government launch The gambit. program. This is the see it well. So

1:40:40 Gambits. Max. Resolution. Still has not been declassified. We don't know how sharp it was. This thing launched in 1963, and it is still classified. How good it was.

1:40:52 But it has been confirmed. That The resolution was under two feet. Which was Better than the U two cameras.

1:41:00 Whoa. Less than two feet from space in nineteen sixty three. Next was Hexagon. Hexagon was the quote see it all program. Now this is starting to eclipse a little bit my technical knowledge, and I think there's also just less known about this because a lot of this is still classified too. I believe the hexagon satellites had longer.

1:41:22 orbit lifespans and had more film capacity before they decayed and so I think they were able to kinda like see more longer, I think is what Hexagon was. You basically would need larger format film. with a wider angle lens if you don't want to increase your number of satellites. Yeah.

1:41:40 I'm fuzziest on hexagon. Then In nineteen seventy seven, they launch Kenneth. K E N N E N Which

1:41:49 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.

1:41:57 In uh I think it was twenty nineteen. When Trump was president. He tweeted. A uh intelligence photo. That was just like this incredible photo of, you know, incredible resolution of something had happened somewhere, maybe in Iran.

1:42:12 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 Kennon. Program. Huh.

1:42:24 So what was Canon? Canon. was see it now. It's the first real time.

1:42:31 space based surveillance system. I guess maybe the first real time surveillance system period. I don't know. By nineteen seventy seven there were enough communication satellites. Up in the sky. And digital photography had come along far enough. The Canon satellites are

1:42:48 like what we think about like Google Maps, like it's real time digital. Photography. beamed down via a ground link. two stations in real time. Wow.

1:42:59 And Lockheed has to build their own digital workstations. process these photos. to display them, to manipulate them like

1:43:08 I think These might have been the first or like really early. Digital photo. processing manipulation workstations that were sold to the CIA. I didn't know about any of this. Yeah, Lockheed built all this in Silicon Valley.

1:43:21 Wow. By the way, you keep saying Google Maps. There's a fun piece of trivia that I'm curious if you know. Do you know I think it was the code name, the original name for the Corona program. Oh, Keyhole, yes. Yes. Which is one of the companies that Google acquired that became Google Maps. Yep. Different keyhole.

1:43:40 different keyhole, but I'm pretty sure keyhole ink. which became Google Maps was named after this Keyhole program. Ooh. It very well could have been,'cause it was nineteen ninety five when that was declassified and I'm sure Keyhole was started after that. Yep. Just super cool. Along the way. L M S C also does a lot of pioneering work in weather satellites and they launch weather satellites.

1:44:04 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 uh

1:44:34 opened up to uh 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 uh we still have no idea about. Wow. Yeah. One thing that we have

1:44:49 A lot of idea about that they built That I had no idea. Till um Researching uh all this. So, you know, we're now in the seventies as this is going along and We'll come back and talk a little bit about this as we come back to Skunkworks here in a sec.

1:45:03 But we're getting towards the end of the Cold War. And this stuff is less urgent. Lockheed and LMSC. start moving into non military applications or trying to But LMSC

1:45:16 Gets a contract from NASA. And builds. The Hubble Telescope. Did you know that? I did know that.

1:45:23 And Martin Marietta, future Martin in Lockheed Martin, built the large orange fuel tank for the space shuttle, which took the Hubble telescope to space. That's so awesome. Different companies at the time. Now the same company. Yep.

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1:47:27 Okay. Two other things that I wanna talk about with LMSC. before we come back to the coda on Skunk Works and The Blackbird and all that. One. I think I alluded to this earlier.

1:47:40 LMS C Listeners, you be the judge. The stories that we've just told is this more impactful to America and the world than what Skunk Works was doing. Personally, I kinda think yes, but you know, maybe you can debate. What is Undebatable.

1:47:55 Is that LMSC from a business standpoint within Lockheed became the crown jewel of the company. Hm. Which isn't true anymore. Or at least it's not their largest business today.

1:48:07 Well I think at times in the sixties and seventies and eighties. LMSC was the largest. Business by revenue. But

1:48:15 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 seventies.

1:48:26 There were years where LMSC generated more than one hundred percent of the profits of Lockheed. So all of the rest of Lockheed's gunkworks included. Was in the red. Unprofitable, bleeding money. And LMSC.

1:48:42 Was keeping the company afloat. Wow. And if you think about it, I guess one, like Just what they're developing and the scale of it and these contracts are Huge. Both.

1:48:51 under the ocean and up in space. Two though, what they're doing. It's different than building airplanes. And I alluded to this when I was talking about it's a different talent set. This is much more Technology problems.

1:49:03 And computing problems. That LMSC is tackling here. Yes, they're building missiles. Yes, they're building rockets and all that, but The core value

1:49:12 components of those rockets. It's Computing and silicon. And ultimately software. And as we talk about all the time on this show, like, well, that's really good margins. Definitely better margins than building airplanes.

1:49:24 Mm. So the stats I have, this is from Beyond the Horizons, which also is where a lot of the story, especially of Corona, came from. During the twelve year period. From nineteen sixty when Corona first launched. To nineteen seventy two.

1:49:40 Lockheed as a whole did twenty six billion in revenue over that twelve year period. And just Two hundred and fifty five million in total profit. Not a high margin company.

1:49:51 During that period. LMSC. Accounted for over a third of that revenue. And a hundred and twenty eight percent of the profit. So that's what I was talking about.

1:50:02 Everything else in Lockheed lost money. Or at least in aggregate, lost money. And then during the early post Cold War period from nineteen eighty three to nineteen ninety two LMSC accounted for forty six percent of revenue, so Growing percentage of revenue.

1:50:16 And seventy two percent of profits during that ten year period. Wow. It really is a completely different company today. And I wanna 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

1:50:32 So The other thing I want to talk about before we come back to Skunkworks is LMSC's operating Principles and philosophy and

1:50:42 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.

1:50:55 So Kelly had his fourteen rules. LMSC had seven tenants. And most of them are very similar to the Skunk Works rules. We'll link to a um image of them in the show notes. One of them though that I wanna highlight and discuss that

1:51:10 to me stands out as different from Skunkworks. Is tenant number one. And that one is Focus on a threat based need. I think that's really interesting.

1:51:22 Huh. To me when I read that and thought about it. That element is missing from Skunkworks and Kelly's. Philosophy.

1:51:33 Oh this is conjecture here. Like there's no Skunk Works book about LMSC. So like we have very little information to go on. But if that really was Tenant number one. Four. The company.

1:51:45 I think you could maybe extrapolate that a little bit too The market context is really important for what you're doing. And don't lose sight of the market context for what you're building. Kelly's philosophy of all that matters is rapid delivery of superior products. Nowhere in that statement. Is there room for the market?

1:52:05 Well, who decides what's superior? Maybe A small number of people want this, but do a large number of people want this? Like how important is this? Obviously what Skunkworks was doing was really important. Or so they thought. I mean, if they knew about this robust spy satellite system

1:52:21 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 seventy one. Can you please take us back to Skunkworks? I'm like dying for my Mach 3 airplanes and ribbon engines here. Uh okay.

1:52:36 Let's do it. But keep that in mind though. A threat based need. Was there a threat based need for the SR seventy one? Maybe. My computer wallpaper needs to exist, so that's a need. Oh, there was a market need. Was there a threat based need. Okay. So

1:52:52 Skunkworks. The greatest airplane ever built. Gee, it sure would be nice. If we had a plane. that couldn't be shot down. So

1:53:02 W Gary Parrow is the shutdown in May nineteen sixty. Of course, as you would expect. The CIA and Skunkworks. is already hard at work at the successor airplane to the U two.

1:53:14 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.

1:53:26 The U two's primary Defense as it so happened, wasn't intentional, but as it happened in practice. was how high it flew. It was obviously trackable on radar. Seventy thousand feet. Yep.

1:53:39 It's not like you could evade enemy fighters or missiles in this thing. It had a hundred foot wingspan. It turned like a school bus. It was how high it flew. And then all of a sudden that was no longer Defensible. So it's not very fast and it doesn't fly high enough to evade missiles, so kind of useless. Yeah.

1:53:59 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.

1:54:07 operate a program like this. One was fly high enough. That's what the U two ultimately did. There was also, though, Fly so that it can't be seen by radar.

1:54:18 Stealthy. We'll come back to that. In a few minutes here. And then three. Make it go so fast that even if they do fire at you.

1:54:27 It just falls behind and then explodes miles behind. Your Incredibly fast airplane. Yep. So uh

1:54:36 That's the path they took. If you can't evade'em, outrun'em. Yep. It's like the Sonic the Hedgehog of airplanes. So

1:54:44 This program. If you know anything about the S R seventy one Blackbird, you're like Well that's a air force airplane. We're talking about the CIA here. The Blackbird was not a CIA airplane.

1:54:55 The program that the Blackbird ultimately came out of was the A twelve ox cart. This was essentially the same airplane. We'll talk about the differences in a minute. But this was the CIA contract that they had Skunkworks. working on and it was yeah the goal make this thing so fast that whether they see it or not

1:55:13 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.

1:55:25 And to be able to avoid surface to air missiles. Yeah. Basically meant that the spec for this thing. were that it had to go Mach three or faster. Now

1:55:37 to outrun any, you know, missiles. It had to do that. With a pilot in it. There had to be humans in this thing. Faster than Mach three is faster than two thousand miles an hour. If you fire a rifle

1:55:50 That bullet doesn't go Mach three. If you're standing on the ground and you pick up a rifle and you shoot it, And an SR seventy one flies over your head, the SR seventy one will beat the bullet. Yeah. It goes about Two thirds of a mile every second. This thing also

1:56:06 is not very good at turning. As you would imagine. So there's a fun stat about the SR seventy one. It cannot be turnaround in the state of Ohio. It's turn radius to change direction by one hundred and eighty degrees.

1:56:21 He is a wider turn than the state of Ohio. Oh wow. It's decommissioning mission just to show off how fast it ever went. Was one hour and five minutes from LA.

1:56:33 to DC. For being placed in the National Air and Space Museum. Yeah. Coast to coast in an hour.

1:56:41 Wow. And at this I remember being a kid and looking at this thing like well why didn't we commercial then like Y you can't commercialise this thing. You gotta be in a space suit to fly this. Totally. It flies at eighty four thousand 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

1:57:01 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.

1:57:13 And that's not terribly useful. So they had to invent a new navigational guidance system that sits on the top of the plane R2D2 style, looking like an Astro Mech from Star Wars, to navigate by the stars. So great. I mean, it is like 50 concurrent miracles. That went into making this thing possible. And hopefully this is obvious, but just to make the point again, you know, some of you might be sitting there being like, Well, you just told me about how the sister company LMSC

1:57:41 Did all this amazing stuff in space. You go a lot faster than that to get to space and whatnot. And like Yeah, but you don't have humans on there. So a pilot's gotta fly this thing. And these aren't rocket engines, these are jet engines that they figured out how to make go Mach three. Yeah. Okay. So when Skunkworks and Kelly and Ben Rich and everybody sit down to work on this

1:58:01 The current State of the art. Fastest plane at the time. This is Late nineteen fifties when they start working on this.

1:58:09 Is the McDonnell Douglas F four phantom. Which is able to hit just over Mach two. with its afterburners on. So not sustained flight. Like when you punch the afterburners.

1:58:22 It can barely touch Mach two. And The F four itself was only a bit faster than the Skunkworks built F one oh four, Starfighter. that Ben you mentioned earlier, which was the first Collier trophy that

1:58:35 Kelly Johnson won. So the idea that you were gonna Achieve Cruising speeds, like sustained speeds above Mach three. This is a big piece to bite off here.

1:58:47 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 after partners. It is still to this day, unless there are classified programs we don't know about. the highest and fastest

1:59:03 humans have ever flown without rocket propulsion. Yes. Okay, so how are you gonna do this? The only way you can do this in a Yeah.

1:59:12 Powered plane. is to essentially design something that can run with afterburners on all the time. Like they're not afterburners, they're just Burners. It's how the thing goes. To do that.

1:59:25 You A required a tremendous amount of fuel And B You also produced Heat in doing so that's like Rocket level proportions.

1:59:36 The Skin of the airplane gets to five hundred degrees Fahrenheit. The area near the engines on the airframe itself gets almost to a thousand. Yes.

1:59:47 And the engines I think inside the engines get to close to three thousand degrees, I believe. So they had to build the whole plane out of titanium. To uh make this work. Which was a metal that no one had ever built a plane out of before. Right.

2:00:00 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.

2:00:18 Yes. And they source a large amount of the titanium that goes into the Blackbirds, the A twelve's and then the Blackbirds. out of the Soviet Union. Oh too funny. And by the way, you can't machine

2:00:33 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.

2:00:51 Totally. And I think Tradition additional materials like aluminum would lose its strength around three hundred degrees. So like you actually need a different material, otherwise the whole plane would just dissolve. When it got that fast.

2:01:04 Amazing. So There's another funny thing here, which is metal expands when it gets hot. And normally your airplane materials don't get that hot'cause you're not going that fast, so it's fine if the metal expands a little bit. Except

2:01:19 When it's getting this hot. The panels, the skin of the airplane is gonna expand quite a bit. So that means if They expand a lot, you have to leave a lot of room. So

2:01:29 How do you leave room? So what they want it to do is fit together really snug while the plane is flying. Which means the panels have to fit together kinda loose. When the plane's not flying. Ben, are you telling me that the Blackbird had panel gaps?

2:01:44 The black bird had panel gaps. And to add insult to injury. There are a variety of reasons they decided not to have custom fuel tanks. They literally just made the skin of the aircraft the fuel tank. itself, so you didn't need sort of multiple you needed it to be light. And you needed a lot of fuel in there. Right. And so when it was on the ground after you fuel it up, because there's gaps tank, it would just

2:02:09 Leak fuel. While it was sitting on the ground, so to solve this problem. They went to shell and had a custom fuel created for it that was not flammable. on the ground. Like you could smoke a cigarette next to it and it wouldn't burst into flames because after you fuel this thing before it took off, it's just gonna leak fuel all over the tarmac. Oh my God. This is one of the reasons why um

2:02:32 It is maybe spoiling it a little bit, but uh Flash forward. The Air Force hated operating these things. Yeah. I mean it costs I think three hundred million dollars a year just to maintain these things. These were beasts from hell in every sense of that phrase.

2:02:48 The good and the bad. Yeah. Okay, so that's some. Yeah. Another problem.

2:02:56 was on the engines. So The most advanced jet engines in the world at the time. was the Pratt and Whitney J fifty eight. And I believe actually they weren't even able to get the J fifty eight in the first

2:03:09 A twelve and then only later in the Blackbirds. Did they put it in? And we should tell people the Blackbird, the SR seventy one, was the two seater Air Force version of the single seater A twelve CIA airplane. Yeah. So

2:03:23 Even the J fifty eights. couldn't produce nearly enough thrust on their own. to get to and sustain the Mach three plus speeds that They needed to hit spec. In fact, at least according to Ben Rich in Skunkworks.

2:03:37 They could only produce about twenty five percent of the thrust required. So Leads a team that engineers. The spike.

2:03:46 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. If you live in Seattle, go to the Museum of Flight. There's a handful of these at various museums around the country.

2:04:04 You owe it to yourself if you have not seen one of these things in person. Uh it's just one of the most amazing objects. Ever created. Ever But these cones, what do they do?

2:04:13 So the engines. Get the thing up. And then once it's up in the air. The cones Expand and retract.

2:04:20 First suck in. And then compress and then superheat. Massive amounts of air. that they then mix with fuel in the engines. And ignite.

2:04:32 Essentially this is the world's most badass supercharger. ever create. These things are superchargers. That's what they are. The spike system is a supercharger for the engines. It provides. Three quarters of the thrust. Needed to get to

2:04:48 Mach three plus and sustain it. Unbelievable. Obviously. Dave and I are fanboying this thing. It's really easy to feel good about this airplane because it also never carried guns. It only carried. You couldn't shoot bullets out of it because uh it's faster than the bullets. Right. But they did consider

2:05:07 I think Kelly and the Skunkworks team were really advocating to build a tactical aircraft that was based on this or bomber. And that never happened. So every version of the SR seventy one or the early prototypes of the Archangel or the CIA spy plate, they're only ever Badass airplanes that carry cameras. And go really fast. Yeah. Yeah.

2:05:29 So Fortunately, you know, Scott Gorks and the CIA had started working on the A twelve ox cart. Before Gary Powers was Shut down. It takes

2:05:38 believe quite a while to engineer this beast. They start test flying it in April nineteen sixty two. Of course that. Area fifty one. Where else are they gonna do this?

2:05:49 Once they start test flying it, that's when the air force finally gets interested in the project and is like, Oh, we want our version of this and that's how The Blackbird comes about. Fun little bit of trivia. Within the Air Force and the Pentagon.

2:06:02 The project originally was called the R S. Seventy one. Yes. Not the S R. And the S R seventy one is strategic reconnaissance, but it ended up being backwards. Yeah, so funny. It happened because

2:06:16 President Lyndon Johnson actually announced the existence of this thing in a national speech, and uh during the speech he calls it the S R. Seventy one instead of the R S. 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 S R seventy one and intentionally Modified the speech.

2:06:37 Who does? What is relevant though? Post Cold War. A huge thing here. So once Johnson says this. Nobody is willing to contradict the president. So

2:06:48 Skunkworks has to go and like redo all of their documentation for the whole damn thing. You can imagine Kelly Johnson's reaction to this. Yeah. So the first official flight of the Blackbird. Happens on December twenty second, nineteen sixty four. It reaches a top speed of Mach three point four. God. The airplane wins Kelly his second collier trophy.

2:07:11 I mean still to this day people lose their minds over this thing and it's stunning. It I believe has never been shot down. There are 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 nineteen sixty eight. It has played roles in surveillance in Vietnam, Korea, Arab Israel conflict in the seventies, obviously the USSR.

2:07:40 There's stuff you can find out there on the internet. Obviously nobody really knows, but supposedly, according to Internet lore, over four thousand missiles have been shot at Blackbirds and none of them have ever hit. It is just such an Awesome badass thing to

2:07:55 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 kinda 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.

2:08:18 I think you're right. Yeah. Well, here's one area where I'm wrong. I do think that statement is mostly right, but You could argue with it and people do and did.

2:08:28 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.

2:08:44 If an enemy knows Yeah. 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.

2:08:58 So it does have a use. It's not like it's useless. But unlike the U two, which was everything. It's more of a niche use case here. So the blackbird doesn't fly today.

2:09:09 civilians are unaware of something that has flown faster. There's a crazy stat, a little bit of trivia about the SR seventy one. And this really puts into context how early this was And

2:09:23 how strange it is that we've had nothing faster since. The SR seventy one first flight. was closer to the right brothers. than today. Yeah.

2:09:33 Wild, right? It's totally wild. And I mean this whole thing was built with slide rules. I had a very controversial tweet get uh community noted. where I said that it was before the invention of the desktop calculator. It's like mostly true. There's technicalities to it, but you know, Kelly and team basically

2:09:52 did this thing independently of computers and calculators and figured out all the unbelievable aerodynamism stuff about it. Of course, there's also It's The first stealth airplane. I mean, that's the other thing that we didn't talk about is the reason this thing wasn't detected on radar for four years because they figured out how to fly and start to evade radar.

2:10:13 Yeah. Now I don't know. the details of stealth with the blackbird. I imagine a big part of that was The height.

2:10:22 Was the altitude and the speed of it. It's not that, I don't think. It's more around the shape,'cause radar will just go unimpeded, you know, out into space. There's uh 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 seventy one's bottom was one of the first airplanes with a flat bottom rather than a rounded fuselage. And so

2:10:50 Imagine I'm shooting a set of waves at a round sphere in front of me. Well, some of those waves are gonna bounce back because some of that sphere is Exactly. Perpendicular to me broadcasting it. There's one particular point that's exactly perpendicular, and I can kinda tell the radius of the thing. by how I'm detecting waves that are bouncing back at me.

2:11:13 But if it's all flat. there's only one very specific angle for which I can shoot waves at it where I'm perfectly perpendicular and every other angle that I shoot radar at it, it's gonna bounce off and not come back to me as a transmitter. You'd need transmitters cod the earth to figure out where all those waves are bouncing. And so by making the bottom flat. They made it so that if it was truly flat, then there's only one exact moment in time that a given

2:11:41 radar transmitter is useful. Uh, that's cool. They also did a whole bunch of work around making the rivets exactly flush with the skin. So it basically didn't have a whole bunch of rounded parts that could risk Bouncing. radar waves back at the transmitter receiver.

2:11:57 Super cool. Keep in mind. For a minute from now. That idea of flat surfaces and plates and Radar Planes.

2:12:05 Not airplanes, planes like a flat plane. And uh surfaces. Okay. To close out on this amazing. Airplane.

2:12:13 Basic and sad in a lot of ways. It's hugely expensive to build these things. Thirty three million dollars per plane. Which was a lot back then. I mean played style cost more, but a lot and then as I said, three hundred million dollars a year just to keep them operational and run the program.

2:12:29 You couldn't use it as a fighter or a bomber. It was only reconnaissance. It's not super popular with the military and the air force. They kinda don't like it. As an operational plane. Right. It's a lusty airplane. Yes. It's not a daily driver, let's put it that way. In nineteen seventy, the Pentagon cancels further orders and they order skunkworks to destroy all of the titanium tooling.

2:12:54 For it so that no more can ever be built. I assume that's so that it doesn't fall into enemy hands or something like that. And it's like we're serious about telling you we're done ordering these things and we don't want political maneuvering to spin it back up. So we're gonna be prohibitively expensive for you or for anyone to ever think about starting the program back up. Yeah. The existing ones do stay in service. But obviously this is like a big blow to Scunkworks revenue. Uh but they're not producing these things anymore.

2:13:21 On the back of that, Skunkworks has to do layoffs, the Skunkworks division. After the contract is cancelled. In nineteen seventy two, two years later, Lockheed and Skunkworks lose the bidding for the F sixteen fighter. General dynamics wins that.

2:13:37 Ironically. The later. Lockheed right before the merger with Lockheed Martin. would acquire general dynamics fighter plane business. So it does come back into Lockheed. And it is still they call it out in their earnings like today. They're still selling F sixteen's today.

2:13:52 So here's what's interesting about this contract and Lockheed and Skunkworks losing it. This is an example I think of to that first tenant from LMSC of threat based need and real, you know, need, market need, you maybe you want to adapt that to Kelly Johnson As amazing and a genius as he is.

2:14:12 is a very stubborn man. And The Stated purpose the Air Force's goals with the F sixteen.

2:14:21 Fighter. It didn't need the best. It needed to be cheap and that they could make a lot of these and they could use them all over the world. That's not Kelly's MO and so He and Skunkwork spitting on this project.

2:14:34 They kept trying to give the air force what they didn't want. And they lost it. Like the idea of Skunkworks losing a contract, this is crazy. And in particular. He didn't really want to play ball the way the government was trying to bid out the contract. he looked at the requirements, he said, This is stupid.

2:14:50 I'm gonna design you an airplane that I think meets the needs of how this'll be used in the field rather than what these technical specification say here. And Over the long run, he was right. As the program evolved, the specs actually changed to what Kelly decided to build their prototype airplane to do, but the prototype they produced was not in spec for the original. F sixteen requirements.

2:15:13 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 fifties.

2:15:32 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.

2:15:47 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'cause nobody knew about it. Right.

2:16:03 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. Skunk Works is doing layoffs.

2:16:22 Lackied. Really? Stupidly decides to try to get back into the commercial aviation business. L ten eleven. They L ten eleven, which by all accounts was a great Airplane, but turns into a disaster.

2:16:37 project. They're trying to compete with Boeing and with McDonnell Douglas here. The D C ten, I think was the McDowell Douglas competitor. Lockheed partners with Rolls Royce to make the engines. right as Rolls Royce goes bankrupt and gets nationalized by the UK government.

2:16:52 All told, we won't go into the whole history here, but the L ten eleven Airliner. Project. loses Lockheed. Two and a half billion dollars.

2:17:01 And as we said a few minutes ago. This is not a super profitable company. They don't have two and a half billion dollars in other earnings just sitting around to soak up the losses here. Yeah. At the same time

2:17:14 Lackheed also gets caught up in really nasty bribery scandals around the world. But these are nasty political scandals themselves and Basically Lockheed comes out looking, at least to the American public, like kind of a corrupt arms dealer.

2:17:30 So what happens is You know, Lockheed and lots of people would argue that this is just the way you needed to do business in foreign countries, our allies that Blockhead sold these weapons too. in the Netherlands, in Japan, and in Saudi Arabia It comes to light that Lockheed

2:17:48 employees and contractors are paying bribes to political officials to win contracts. This actually brings down the Japanese prime minister at the time. Whoa this is a huge scandal in Japan on the order of Lake Watergate in the US. Huge scandal. Sega actually makes an arcade game about it called I'm Sorry about the prime minister at the time. Like so funny. Lockheed also

2:18:13 On the military side, kind of the main Lockheed divisions. engage with a couple helicopter projects with the military and then the C five galaxy transport plane. Those projects go horribly. They have huge cost overruns. The C five, at least, I think does ultimately become a good airplane, but costs way more than the initial bidding. All of this conspires that especially post Vietnam period, the American public starts to view Lockheed as

2:18:40 This corrupt. Vampire octopus military industrial complex. Squid sucking on America. Things get real bad. Lockheed's finances at the same time are so bad.

2:18:52 They need a bailout from the government. So The government has to guarantee a two hundred and fifty million dollar loan Too lucky to keep them afloat. Mostly because of the L ten eleven disaster.

2:19:03 It requires a vote of Congress to do this. It almost doesn't pass. This is real bad. Hm. Oh, I didn't realize how dark it got there. It got real, real dark.

2:19:13 And again, it was only the profits from LMS C that Kept the company from probably going under. Hm. So okay. We've mentioned stealth a few times here.

2:19:22 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

2:19:37 Math paper published in a Russian journal. Around mid nineteen seventies, 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.

2:19:55 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 seventy one with

2:20:07 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.

2:20:23 than anything we've done before. And I think we can make an airplane go from looking smaller than it is, like a bird to something like a BB. on a radar.

2:20:35 Or a ball bearing, famously. Or a ball bearing. So That Skunkworks employee was then thirty six year old Dennis. Overhaulzer. who uh was a mathematician and He

2:20:49 Like you said, reads this paper and brings it to Ben Rich, who just six months earlier had taken over from Kelly as Head of Skunk Works. And he's told don't stick your neck out, no one's getting the crazy amount of rope that Kelly had, so prepare to just be Lockheed's yes, man, and we're gonna use the skunk works for branding and marketing, but we're not doing anything too nutty in your little shop over there. And even Kelly himself

2:21:15 He's retired, but he stays on as an advisor, so he still has his fingers in everything. He's so disillusioned at this point. He tells Ben Rich he says Don't even pursue this. It's not worth it. Missiles are where the future is. Nobody's making planes anymore. Don't invest the money on this.

2:21:32 And it 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.

2:21:45 It will be a thing that is invisible on radar. But Kelly sort of looks at some of the early sketches of what you would have to do to make this thing into an airplane and basically thinks That's not an airplane. That won't generate lift. He's such an aesthetic snob. He's like, that's not an airplane. We can't make it. It doesn't look beautiful. And it's not just that it doesn't look beautiful, it's that literally There's like only a hint of Bernoulli in there.

2:22:09 is unclear that it will generate enough lift to lift itself. Yes. Also Correct. Or well, I think the bigger problem was

2:22:19 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 Is

2:22:28 Basically An enormous looking cockpit, this big globular fuselage. And you can Google the F one seventeen A. The name is the Nighthawk. Stubby wings.

2:22:42 These two little super thin tall tail fins. It looks super unstable. And the whole thing has basically zero round surfaces on it. It's faceted. I mean it looks like a diamond. In fact

2:22:55 Its codename, or I would say probably not its codename, but its nickname internally was the Hopeless Diamond. Yes. You know what this thing looks like if you Aren't already Intimately familiar with images of it. I actually think it looks really cool. Totally. But it doesn't look like it'll fly or fly in a controllable way. It looks like you made an airplane, like a paper airplane, and then you put a a rock on top of it and you were like trying to get that thing to fly. Totally.

2:23:19 To me, it looks like the planes in the first Star Fox game for the Super Nintendo when Nintendo and other Sixteen bit. game developers during that generation were trying to make three D games with sixteen bit hardware.

2:23:35 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 sixty four. A Star Fox Super Nintendo plane. Right. So

2:23:54 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.

2:24:06 We actually also think stealth technology is worth Pursuing. We have an active RFP out there. We didn't come to you guys'cause Skunkworks hasn't made a fighter plane in God knows how long.

2:24:22 You guys just had lay offs. We don't like the Blackbird. Sorry, you guys are old news. And Been rich. A he like you said, he risked his career six months into the job pursuing it at all.

2:24:34 He risks it even further. He goes back to Lockheed corporate and says I wanna pursue this and make a prototype. Anyway. Without a Research contract.

2:24:45 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 amoritized 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. Yeah, reading

2:25:06 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 D O D is the customer. You know, it's like the Amazon like, oh, the empty seat for the custom in the room. It's not a metaphorical customer. It is a specific customer. No. It's like what does the Pentagon think?

2:25:28 Which is a good and a bad. They're unbelievably customer focused. Lockheed Martin doesn't build stuff. unless the US government says I'll order it, which means they don't have to take a lot of risk. But on the other hand, they also don't get the upside from taking risk typically. And this is how crazy this situation is. It is literally the opposite of what you just said. This is Ben Rich's neck on the line. This is Skunkworks on the line.

2:25:51 This is everything. So they go and they build a prototype. It's nicknamed the hopeless diamond. The codename is Have Blue H A V E B L U E. And I mentioned ball bearings earlier. They make a model of this thing, a wooden model. They put it up on a poll. They test it in uh radar range alongside the other prototypes from other contractors for a stealth fighter that the Pentagon has put out.

2:26:14 And This thing is invisible. The way that the air force Inspectors. come up with testing it is they

2:26:21 Get a set of ball bearings. of increasingly smaller diameters. And they attach them to the nose cone of the wooden model at the radar range. And they see If you can detect

2:26:33 The ball bearing, or if it's blacked out by like this massive Playing model behind it. And They can Detect a ball bearing.

2:26:42 down to a diameter of an eighth of an inch. So the radar signature of this plane is less than an eighth of an inch sphere. It's unbelievable. The thing is All flat surfaces.

2:26:53 So it basically bounces the radar everywhere except for the transmitter receiver that is actually shooting the radar waves. 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

2:27:13 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 Skunkwork's history.

2:27:25 The way you control this thing is with fly by wire, which I'd heard that term before, but Fly by wire means that the plane's systems are controlled by a computer and when you move the controls as a pilot You are not directly moving the mechanics. The computer decides how to translate your intentions. Into stabilized movements for the plane.

2:27:47 Power steering. Exactly. Well it's even more than it's like Doing all sorts of stuff that you have no idea. Right. to make it do what you want to do. Right. I mean it's a Tesla, basically. It's abstracting away your inputs and doing the thing that is optimal based on what it's pretty sure your inputs want it to do. Yeah. So they win the contract. They start testing this thing at

2:28:08 Of course, area fifty one. 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'em either. The air force starts taking delivery in nineteen eighty three. Of the stealth fighter from Skunkworks. They ultimately buy fifty nine of them of the F one seventeen A Nighthawks.

2:28:31 At forty three million dollars each. So that is two and a half billion dollars in revenue for a Lockheed. A a time when they desperately needed it and Skunkworks desperately needed it. Huge win for Ben Rich. Huge win. The real combat debut for the Nighthawk is during the Gulf War, during Operation Desert Storm. So that's what, six years that they keep it

2:28:53 undeployed where they have it, but the US 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 One hundred four Star Fighter? I think that's right. I mean, yeah, the F in F one seventeen is fighter. The SR seventy one was not an F plane. So

2:29:20 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.

2:29:31 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.

2:29:42 The US. Air Force. completely knocks out. All of Baghdads.

2:29:49 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.

2:29:59 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.

2:30:21 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.

2:30:34 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. Reds.

2:30:49 And then uh another quote here from one of the pilots that flew that night. To put it in domestic terms. If Baghdad had been Washington, That first night we knocked out their White House, their Capitol Building, their Pentagon, their CIA, their FBI, and took out their telephone and telegraph facilities. We damaged Andrews Air Force Base, Langley, and Balling. And we punched big holes in all the key Potomac River bridges. And that was just the first night.

2:31:15 So this thing is deadly. The Nighthawk very much worked. The Nighthawk flew one percent of the air missions in Desert Storm, but accounted for forty percent of all damaged targets. And so while this plane was s 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

2:31:40 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

2:31:51 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.

2:32:04 Right. It's fascinating. Yeah, totally. But here, this stuff is used and a lot of people died. For the F one seventeen A, ten thousand people worked on this airplane, the Nighthawk, and kept the secret for twenty one years until it was declassified. Wow.

2:32:19 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, but

2:32:34 That's also kinda the end. That's the end of the Cold War. Yep. There is no doubt. After Desert Storm and all the other things that happened. Uh the falling of the Berlin Wall.

2:32:43 By the Early to mid nineties. It's done. And this success of the Nighthawk and success of the US military From the military standpoint, during

2:32:53 You know, that sets the conditions to bring us to the modern era. And Lockheed today, which is not Lockheed, but Lockheed.

2:33:04 Martin. And Boeing today, which is not Boeing, but Boeing and McDonald Douglas and this incredible era of consolidation. Right. And Northrop, which is not Northur, but Northrop. Grumman. And which Very closely almost was part of Lockheed Martin.

2:33:20 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 ninety one, I believe. And it becomes really obvious that

2:33:35 The Cold War era of arms build up in the US is over. And defense budgets are gonna shrink. Massively. And we need to start nuclear disarmament. We need to start destroying a lot of the nuclear warheads that we build. Right.

2:33:49 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 nineteen ninety three. The then deputy defense secretary, William Perry.

2:34:03 Calls. The CEOs. Of all the major crime defense contractors. To a dinner.

2:34:10 In Washington. At which He explicitly tells them. Defense spending. Is going to shrink massively. Duh, you know that.

2:34:20 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 gonna be able to feed all of the metaphorical mouths at this table. and the CEO of then Martin Marietta

2:34:36 Soon to be. Lockheed Martin. Refers to this dinner. Ton in cheek as the last supper. And Indeed it was. And this is an amazing event.

2:34:45 Literally. A government agency. Just told an industry. What to do. This doesn't happen in America. Very explicitly. And this was rumored for a long time. People were like, Wait, did this really happen? The US government instructed

2:35:00 these big companies to become anti-competitive to all merge together. And This nineteen ninety three thing really kicks off an era of intentional government policy around Combining companies.

2:35:14 Yeah. Which is very odd. American industry and I think as we Saw during the Cold war.

2:35:22 Yeah. America functions on competition and thrives in competition. And here the government is saying Less competition. And in part They're basically saying look

2:35:32 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?

2:35:54 And so I think the intent here is to say We don't want to lose capability. We want the US to remain A country that has a whole bunch of people that know how to build this stuff. So if we need it, it's there.

2:36:11 But You're gonna put each other out of business because we just won't have enough for you. So you need to like merge and get more efficient so we don't lose the muscle But you know, you all have real businesses, real going concerns. And this whole like so you don't lose the muscle thing.

2:36:27 That is unique on this episode versus any other episode because the government is an indifferent player in almost every episode of every company that we talk about. But in this one, they're an extremely interested party where it is in the national interest. They are the customer. Right. It is in the national interest for us to maintain this capability, or so that's the sort of policy. Yeah. So this sets off An amazing series of events. Kinda similar to um hearing back to the L VM H episode when

2:36:56 Louis Vuitton. What Tennessee. Merged. Not'cause they liked each other or'cause there was a business reason. They merged for like Practicalities and to avoid

2:37:06 Dying and getting taken over by hostile Raiders. In nineteen ninety three. Lockheed buys General dynamics fighter jet business that we already talked about, the F sixteen business.

2:37:16 And then in nineteen ninety four. The big shoe drops, they announce a quote merger of equals with Martin Marietta. That goes through in Nineteen ninety five. Except they didn't merge everything about there's two spin outs of the Lockheed Martin combination.

2:37:32 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 mind safety disclosures? I was disappointed to see that there were no mind safety disclosures in Lockheed Martin's financials. There's another thing that spins out. called L three communications, which is the set of things that won't be combining into Lockheed and Martin. And this has actually become a fairly formidable competitor today. There's the five big primes, Lockheed Martin, Boeing, Raythea, Northrop Grumman, and General Dynamics.

2:38:11 And L three is kind of growing, which is fairly unprecedented in this era. Of Primes. But you might be saying, what is the L three? Well, there were three L's involved in creating this company. One of them was the investment bank that helped combine them. Lehman brothers.

2:38:29 Frank Lanza, Robert La Penta, and Lehman Brothers are the L's. So The Assets that do merge.

2:38:37 Of and Martin. In January nineteen ninety six, shortly after. The big merger. Goes through.

2:38:44 They then acquire the defense business from Laural. For almost ten billion dollars. And then as We said a minute ago. In July nineteen ninety seven, they attempt

2:38:53 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, uh everything's signed off. the DOJ blocks it. I assume with Tacit approval from the DOD on that. Yeah. I mean the thing with the five big primes is they're all like very good at a certain bucket of things.

2:39:18 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 B two bomber and the B twenty one, 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. But all the way back to the beginning of the episode. So the DOJ blocks that, but also in nineteen ninety seven.

2:39:45 Boeing merges with McDonnell Douglas and becomes the giant that it is now. Do you know why that happened? Ooh, I do not. So we're gonna talk here in a second about the F twenty two program and the F thirty five program. We'll just skip over the F twenty two for the moment, just to hit this point. For the JSF, the joint

2:40:03 strike fighter. F thirty five 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 McDonald Douglas. Mm.

2:40:22 And McDonnell Douglas is eliminated from competition. So it just comes down to Boeing and Lockheed as the two finalists. Within a month, Boeing announces that it's buying 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 McDonald Douglas after McDonald Douglas loses kind of need to just combine and size up.

2:40:49 in order to be a formidable competitor to Lockheed Martin going forward. Do you know the size of the F thirty five joint strike? Fighter program like in terms of dollars. I do. It is a thirty billion dollar DOD contract for three hundred and ninety eight airplanes just for the US. We'll talk about that in a minute, but it was a prize worth going for.

2:41:09 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 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 and the military industrial complex and defense contractors today, but to set the stage, I have a few quotes from

2:41:28 Norm Augustine, who was CEO of Martin Marietta. When the merger happens, and Dan Tellep, the CEO of Lockheed, is the first CEO of the combined company, Dan came up through LMSC. Started there, worked in LMS C for decades and then became the CO of Lockheed. He's the first CO of the combined company and then Norm. Takes over for a few years after that.

2:41:48 In nineteen ninety seven. Norman's a character. He's a serious character. He writes a Harvard Business Review article. I want to read a few quotes from this. Following the last supper. Which he termed it the last supper.

2:42:02 It became evident that there were only two potential survival strategies. One was to move into new markets. He's meeting. Commercial markets. A difficult and time consuming option that has rarely succeeded, and as we talked about.

2:42:14 Definitely. Lockheed tried that in the seventies and failed miserably with the L ten eleven. The other Strategy. Entailed something almost as difficult.

2:42:24 Increasing market share in existing markets during a period of severely declining businesses. This is what we're talking about. He says, Here's what happened. He just lays it all out here. Lockheed soon purchased General Dynamics Aircraft Business, and Martin Marietta purchased General Electric Aerospace Business.

2:42:41 All told, our company comprises seventeen Previously independent. Entities like independent until recent times as he's writing this. General dynamics. Sanders

2:42:53 Gold Ocean Systems, GE Aerospace, R C Aerospace, Xerox Electro Optical Systems. Goodgear Aerospace, Fairchild Weston, Honeywell Electro Optics, Ford Aerospace, LibraScope, IBM Federal Systems, Unisys Defense, Lockheed. Martin Marietta and Lorel. What a Franken Company. As we've been alluding to, these were not very profitable.

2:43:15 Entities. So Lockheed at the time of the merger. Did thirteen billion in revenue. And only four hundred and twenty two million in net income. Martin Marietta was slightly more profitable, did nine point four billion in revenue and four hundred and fifty million in debome.

2:43:31 So both of these are like ten percent or less net income margins. 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.

2:43:52 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's sort of reached the stasis. Yep.

2:44:08 Ben Richard. basically called it in nineteen ninety two when he was talking about this at the end of the Skunk Works book, about the end of the B Two bomber program, which by the way, the B Two Was kind of a make good When they gave that to Northrop Grumman. This is the stealth bomber. Yeah.

2:44:24 By all means that should have gone to Lockheed Martin. They had the expertise from the F one seventeen A Nighthawk and I mean, this is the Lockheed side of the story, but they beat the B two in a lot of the early competitions, but the government still gave the award to Northrop Crumman, because there was some particular plane that the government said Northrop could manufacture a bunch of and then sell internationally and then change their mind. And so then Northrop was sort of left holding the bag. And so it was the Department of Defense being like, all right. You can win this competition. And who knows if any of these things are true, that's Lockheed side of the story.

2:44:57 But anyway. Ben writes. Under the current manufacturing arrangements For the B2, Boeing makes the wings, Northrop makes the cockpit, LTV makes the bombs, and the back end of the B2 airplane, in addition to 4,000 subcontractors working on bits and pieces of everything else because the tremendous costs involved. This is probably a bluprint for how big expensive airplanes will be built in the future. For better or for worse, this piecemeal manufacturing approach.

2:45:24 rather than the Skunkworks way, will characterize large aerospace projects from now on. With many fewer projects the government will have to spread the work around across an even broader horizon. What will happen to the efficiency, the quality, and the decision making? At a time of maximum belt tightening in aerospace, those are not just words, but may well represent the keys to a company's ability to survive.

2:45:48 Yep. So I think that sort of nineteen ninety two Ben Rich publishing the Skunk Works book than 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 fifties, sixties, seventies? No, not at all.

2:46:09 It's a completely different thing. And airplanes are just not built. in this sort of autour way, the way that they were in Kelly's era. So let's talk about some of these huge programs, the these large fleets of planes that the US government has bought in recent years. And we'll start with the F twenty two.

2:46:27 And this gives you a sense of how freaking long these time frames take. So in nineteen eighty one The air force. identified a requirement for an advanced tactical fighter to replace the F-15 Eagle and the F sixteen fighting falcon. So that sort of kicks off this

2:46:43 We're gonna need some future thing. In nineteen eighty five, the initial order, and I don't know if it's technically an order or how it sort of changes over time, but the initial pseudo commitment is is for the US government to buy seven hundred and fifty planes of what becomes the F twenty two Raptor. for forty four billion dollars in the total program cost.

2:47:06 Wow. That gets revised down. Again, an airplane has not flown yet. Just before nineteen ninety seven. to three hundred and thirty nine planes, that's going from seven fifty to three thirty nine.

2:47:18 for sixty two billion dollars in total program cost. That cost went up. Even though the number of planes dramatically went down to like half. I was wondering, I was like, did Ben misspeak there?

2:47:32 Nope. Then The F twenty two program is over. There 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. No, it's not as noble. The final down from seven fifty to three thirty nine is one hundred and eighty seven planes delivered.

2:47:53 They kept the sixty two billion dollar total program cost fixed. They managed to do that. So each plane ends up costing three hundred and sixty million dollars if you amoritize all the R and D against the very few airplanes that they ended up making. And I mean the F twenty two, much like the S R seventy one.

2:48:12 There's not much we can complain about with the plane. It is a bad ass plane. In fact for Seafare here in Seattle, the last few years, they've had an F twenty two. It is an unbelievable thing to see live. it performs maneuvers that just look alien. I mean you just don't understand how the physics makes it work. It was all about air superiority. It was all about speed. They took all of the stealth lessons from the F one seventeen and put it into a very fast

2:48:40 air dominating airplane. So The stealth fighter, the nighthawk. was Angular and looked like a Super Nintendo Star Fox plane. Because

2:48:51 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.

2:49:06 And computers weren't advanced enough at the time to be able to Build a three D modeled version of a Radar stealth. Structure.

2:49:16 As they advanced, you are now able to do that. In much the same way that in video games you can now build lifelike looking three D models out of the same polygons before. And so The Sega, I think it was the model three arcade board that we talked about. That was part of the real three D revolution in video games. They used it in the arcade cabinets, right? The cutting edge better than home consoles computers. Virtua racer, virtua cop, virtua fighter being the big one, we're on that.

2:49:49 Sega co developed those boards with Lockheed Martin. In order to model the stealth airplanes. Yes. Unbelievable. That is insane.

2:49:59 So fun. So What we can see here is that sort of the classic modern Boondogs probably the wrong word, but program gone awry where

2:50:10 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 Amaritize all the R and D costs. And because of the way that these contracts work, it's not the tech company that's left holding the bag. It's not the contractor holding the bag.

2:50:32 It's total cost plus. model, the company, the contractor, Lockheed, doesn't take any risk. And so who's holding the bag? The government's just pay more for each airplane. Rather than You know, you could imagine if I was uh Apple

2:50:46 And I sunk a billion dollars into developing the next great device and then no one bought'em. I'm out a billion. But in this scenario, the government's like, Look, I told you I'd pay that much. I'm paying that much and unfortunately I just Can't spread the R and D across as many units. Wow.

2:51:02 It's the R and 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. It's A lot.

2:51:13 Right. following Ben Rich's sort of, hey, I think this is how airplanes are gonna be made in the future. This happens in forty six states. The F twenty two is built in forty six states.

2:51:25 Yes. And it requires ninety five thousand jobs. Which in some ways is good. It's good to employ people. In other ways.

2:51:34 the reason that some of these projects get funded is because it creates these jobs. And the reason that it's in forty six states is because That way. Basically every member of Congress is incented to vote for it. You're talking about pork barrel politics.

2:51:52 Exactly. So I think Lockheed has become world class at understanding where their bread is buttered. Yes, they're customers, the US government. But the people approving their funding are individual people. these members of Congress who all want to get reelected. And so Lockheed spreads all these operations around. They employ all these people and members of Congress love nothing more than creating jobs for their constituents, and they hate nothing more than participating in a vote that eliminates jobs.

2:52:19 And so Congress can kinda be simplified to five hundred and thirty eight principal agent problems. And contrast that with the team of, you know, what fifty engineers and a hundred machinists that built You two? Yeah, of course the F twenty two is a much more advanced airplane than the U two, but

2:52:37 The size of the engineering challenge. relative to state of the art technology. It was way less than the size of the U two engineering challenge relative to state of the art technology. Yeah. So

2:52:48 Then there's the next program that comes along, the F-35 Lightning 2, 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 pools its resources and the DOD sort of works across the armed services and they reach out to all of our allies

2:53:07 Britain and others. And they say, What's like a common platform? That we can develop. So that we can Get the best economies of scale out of this thing. That's the right thing for the American taxpayer. And so they come up with this idea for the F thirty five Lightning too.

2:53:21 And they're gonna make three models. And each of the models are for a different purpose. It's this incredible piece of technology. One of the three models can actually angle its engine down. and take off vertically using its engine to reposition. I don't think they can use this in combat, but they can like use it to move itself around on an aircraft carrier and stuff like that.

2:53:44 It's pretty incredible to watch videos of it if you just go search on YouTube. Interestingly. Has a different aim and mentality than the F twenty two. It's less about being sort of the fastest plane in the skies, and much more about having the technology and the visibility to have the Best information at all times.

2:54:03 It's sort of a little bit more. looking to the future of information based warfare more than pure air superiority and speed. It's not all the way to like a drone future or a cybersecurity future, but you can see it drifting there. Really intense communications between a whole squadron of fighters, intense heads up displays with digital stuff for the pilots in the cockpits and in their helmets. And so it's sort of The most important thing.

2:54:29 Technology forward. plane program ever. So When I say Big, I mean really big in terms of the number of orders that are going to be placed.

2:54:39 The initial order book is approximately three thousand Airplanes. worth a potential two hundred billion dollars for the total program cost. Wow.

2:54:51 In practice. It's Kind of as pork barrelie as the F twenty two. Lockheed won the contract, but you know, it's subcontracted, it's peanut buttered out to all the other big programs too. The fuselage is Northrop Grumman, BAAE systems from the UK makes the rear fuselage.

2:55:09 These pieces are shipped all over the globe before final assembly. So we've sort of expanded it even from pork barrel in the US to like Which of our allies can participate in making this thing and thus benefiting in their area too? So here's some of the stats from Lockheed's 2022 annual report. The USA's F thirty five order. is a thirty billion dollar order just from the US. Thirty billion dollars.

2:55:35 That's Three hundred and ninety eight. Airplanes. That is seven hundred and fifty million dollars per airplane. The Swiss have placed an order for six billion dollars for thirty six airplanes, Finland

2:55:48 bought sixty four, Germany thirty five, Greece twenty, the Czech twenty four, Canada eighty eight, Poland thirty two Lockheed Martin. This is an enormous win to win this program and it is Among us and our allies. the largest ever purchase anyone has ever made for any piece of defense equipment.

2:56:07 listening to you talk about that. And contrasting it with Everything we talked about in the story.

2:56:16 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

2:56:31 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.

2:56:40 And they're a lot cheaper. Yeah. Put a pin in that for the moment. I'll finish rounding out. The national defense budget. Just to put all this in context of what

2:56:50 Lockheed sort of represents here. So our national defense budget in the United States is eight hundred billion dollars. As you would expect, that's more than any other country in the world. It's three to four percent of our GDP.

2:57:04 We spend on defense. Interestingly, it is down on a percentage basis of When you think about like the percent of federal revenue spent on defense, it's actually down. Back in the sixties we spent half of our federal revenue on the military. And in recent years, it's fluctuated between twelve and twenty percent.

2:57:24 So I think that's a little bit of a counter narrative to people that like to complain about how much money we spend on the military. Well I guess it is you know, to the Point of consolidation in the last supper. The government was clear. We're gonna spend a lot less. We're just gonna spend it in a much more concentrated fashion. Exactly. The military industrial congressional

2:57:44 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 entities that are like in cooperation with the government. Neither can really exist without each other. And we just are okay with that. We say, Okay, that's how the system works and For better or for worse, private industry and the government are tied at the hip there. Mm-hmm.

2:58:07 So A few more stats on this. So that I said in recent years the Government's DOD or defense spending is between twelve and twenty percent. The total US government budget is six trillion dollars. So defense in there at eight hundred billion.

2:58:24 Clocks in it's actually lower than social security, health care, and income security. Wait a minute, you said it was three to four percent. It's three to four percent of GDP. Uh. But it's twelve to twenty percent of the federal budget. So okay, we know that of the six trillion dollar budget, defense is less than social security, healthcare, and income security.

2:58:45 It is more than Medicare, education, or transportation, just so people sort of know where it kind of sits there. So of that eight hundred billion dollars. About half of the defense budget is spent on contractors like Lockheed Martin. And of that four hundred that's spent on contractors, Fifty billion goes to Lockheed. They are the single largest recipient.

2:59:08 Uh federal spending as a contractor full stop. Wow. Not even just defense across all companies. Across all companies. Wow. I knew they were the largest defense contractor, but I didn't realize they were the largest Government contractor, period.

2:59:23 Yeah. 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 fifty billion that goes to Lockheed Martin from the federal government.

2:59:37 How much of their total revenue do you think that is? Oh, it's gotta be like ninety percent. It's close. It tends to hover around seventy five percent. So uh sixty six billion dollars. was Lockheed's total revenue last year, of which fifty billion came from the US federal government.

2:59:55 Makes sense. And I get the rest, I would assume, would come from foreign governments. Correct. Yeah, our allies. 'Cause the US government basically has a rofer on anything and can put the kibosh on Lockheed exporting to anyone. It's not terribly profitable. Their net income margin is eight percent, as we've been sort of talking about the whole time. You can sort of like see the cost plus pricing.

3:00:17 right there at the bottom line of the company. Lockheed Martin makes a bunch of money. And at the end they only have eight percent. And that's basically contractually figured out. I think whenever one of these contracts gets bid out. the big defense contractor says, I'm gonna slap eight, nine, ten, eleven percent on top of it, and that's gonna be the cost. And that is exactly why their financial statements look the way they do, is because that's exactly how the government decides to fund it. Which we should probably talk a little bit about the

3:00:46 rationale for that. I'm no expert in this and uh We should probably have an economist on A C Q two at some point in time to talk about it. But My understanding is that

3:00:56 While Warren Buffett and Charlie Munker hate cost. plus contracts and in general They set up Terrible incentives.

3:01:05 They are useful in cases where you don't know what the cost is gonna be, but it's a incredibly important investment to make. And traditionally that has been defense expenditures. Yeah. Like We need the you two.

3:01:20 We don't know what the cost is gonna be. But we need it to happen. Yep. We need the Corona program. We don't know what the cost is gonna be, but we need it to happen. And I think that is the rationale of how we got here. But it doesn't make sense when the government's buying more modern things. Like we're buying

3:01:35 Software as a service. Let's say I'm making Slack and I'm selling that to the government. If the contract to procure something that looks like Slack requires me to bid on it in a certain way. And I'm using Slack, there's lots of defense software you could sort of think about here. Palantir, for example. How do you let the government put out

3:01:54 a contract to bid on that's structured a certain way when the way that you've decided to structure your company where you do R D up front, you're willing to take on some of the risk, and then you want to sell something in Amoritize your R D across all of your customers the way that every tech company does, and the way that you sort of get operating leverage on your company. That doesn't fit. In these gigantic cost plus contracts. In fact. what it ensures is you cannot get operating leverage on your company.

3:02:21 no matter how large you scale You will never have big fat gross margins that outrun your fixed costs. It's like the opposite of what every tech company is trying to do. Right. This is sort of the great irony in the 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.

3:02:47 Yeah, someone told us as we were preparing and 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 a very important thing. Probably changing and certainly there are smart people in the government that recognize this and they're pilot programs to be able to buy

3:03:13 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 Angular or Others.

3:03:26 Yeah, they're selling hardware. They're not selling software solutions. Yeah, I'd say we're in the first out of the first inning in trying to figure out how to sell software to the Department of Defense. Which is sort of scary when you think about it, because like I suspect, you know, most acquired fans will not find this a controversial statement, but I think it's quite likely that modern warfare is gonna occur.

3:03:49 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.

3:04:02 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 Andorils of the world and the Palantirs of the world. kind of sucking up top talent that has this as a thing that they're really passionate about working on. Yeah, there's also a huge difference now versus

3:04:26 Certainly World War Two, but also the Cold War. The motivation of people who are going to work That's gunk works. They were doing it. out of patriotism for their country. Like the clear and present threat.

3:04:39 Of the Cold War. was an extremely motivating factor. That's not there in the same way today. Very different time we live in. Very, very different time. Or at least there's a 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.

3:04:53 Well, which is so funny about this whole thing, the Cold War and now. Perception is reality. Nobody really knew then. And nobody really knows now what the reality of the threat is. But the perception is what drives people's behavior and that's what drives the economy.

3:05:10 It is in the government's interest for everyone to feel safe and secure. And so you can sort of rise above Maslow's hierarchy and do other stuff with your life and like create Innovate. And live happy, prosperous, enjoyable lives and go to work and do things that aren't for defense and drive the economy forward. It is also

3:05:31 In the interest of the country. To make everyone a little bit aware of how we have this incredible quality of life in the US. And I don't think we're indexed in that direction, even one percent.

3:05:44 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

3:05:57 Military. of why we get to enjoy such charmed lives in this country. And a lot of people that wanna like Go la da 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

3:06:12 Do you live on this planet? I love peace as much as anyone, and that should be the goal. And also The default state of humans Technology changes, human nature doesn't. Right. Unfortunately. there's some set of people who want to like come and take your stuff.

3:06:29 And In the same way that prices 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.

3:06:42 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. Well, I Do generally feel

3:06:53 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 sixty 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.

3:07:14 Journey. With the research and doing this episode for me with Lockheed. And that is the phenomenon of competition and It's impact on human behavior.

3:07:24 Probably for both the Soviet Union. And the US, although I'm less equipped to talk about the Soviet Union. The fact of that competition led to tremendous advances for society. I mean all the things we just talked about. Silicon Valley itself, for God's sakes, wouldn't have existed without this.

3:07:41 So There is sort of a rational argument for having an adversary. Technology and society was pushed forward in America. By The Cold War and by Lockheed.

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3:08:44 to how users actually behaved. So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com slash acquired to get started. 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.

3:09:10 There's aeronautics, which in theory contains skunk works. So that's F thirty fives, F twenty twos, the old F sixteens. The C one thirty J Hercules airlifter. The F thirty five, I believe, is the largest program generating twenty percent of all net sales across all segments. Well, like you said, it is enormous. Right. It's sixty six percent of twenty twenty two's revenue in that aeronautics division. So like aeronautics equals F thirty five.

3:09:40 There's Also missiles and fire control. Then there's three rotary and mission systems, which contains helicopters. They bought Sikorsky, so it contains Sikorsky, the other helicopter company. And then four is space, which includes the Orion capsule that's evolved over the decades and is now part of NASA's Artemis moon program. It also includes ULA, which is the joint venture that we didn't talk about with Boeing.

3:10:06 that was sort of forced upon both Boeing and Lockheed Martin, where they both independently were developing launch capabilities for the US government. This is especially pre-SpaceX or before SpaceX was as powerful as it is today. The US needed to contract launch services from someone. And so Lockheed and Boeing were both developing them. that didn't go terribly well and they ended up asking for bailouts from the government and the government said

3:10:35 Uh, can you two combine? And Lockheed Martin and Boeing came back and said, Are you kidding me with that guy? No, these companies hate each other. And so but they agreed to do it'cause they kind of had to. And so U LA is sort of this shotgun wedding between The two companies on the SpaceX episode. really open the door for SpaceX to come in and compete.

3:10:56 Totally. And the reason they didn't go well was because in sort of the pre-SpaceX era, there were all these companies that wanted to put stuff in space that all ended up going out of business. You think like teledesic, iridium, a lot of bankruptcies. And so Boeing had tooled up this huge factory, Lockheed had done this too, and so they were left holding the bag. And It got really ugly. Boeing was caught trying to steal proprietary data from Lockheed Martin. Ultimately.

3:11:22 This JV has gone well. ULA is going to two X their capacity to twenty five launches a year, which is way more than they used to do, but still way less than SpaceX. Over the next five years or so with this Vulcan rocket. Still more expensive than SpaceX, but you know, they started from big incumbents rather than starting from a startup. So it's just sort of a different disposition. Joint ventures are not permanent things and these companies kind of can't continue to be in business together. So ULA is up for sale and it'll be very interesting to see if one company or the other

3:11:54 ends up buying it. But it is an important part of NASA's Artemis program and others moving forward. It's also important to Amazon. A whole bunch of the Kuiper launches are happening on ULA. Oh, interesting. Is that because Bezos doesn't want to launch on SpaceX?

3:12:11 Neither company will really like say anything about that. Gotta be something in there. Uh billionaire competition. Yes. So those are the four segments. Much like our Sony episode, and I'm pulling forward a playbook thing here. This

3:12:26 is a pretty well diversified conglomerate. I mean, fighter jets are their bread and butter at forty percent of overall revenue, but missiles and space are each seventeen percent, and rotary mission systems are twenty six percent, and all of them are nine to fourteen percent margins. So they all are double digit percentage of revenue and double digit percentage of profit. So congratulations, we've got a conglomerate. All right, well let's head into our analysis section and this will be To kind of pull together a lot of the strings that we've mentioned on this episode, but codify like what are the real takeaways? And like let's understand this business.

3:13:05 and this institution and what it is in our world today. To kinda tie together some of the things we've teased at over the course of History here. And again. Few caveats.

3:13:15 One, we know we did not tell the entire Lockheed Martin story. Nor could we. Two, this is not a political or defense podcast. You can tell that I'm a conflicted person on this. Let's start our analysis section with power.

3:13:30 So what we do in this section is we analyze what it is about a business that enables it to achieve persistent differential returns. Or to put it another way. to be way more profitable than their closest competitor. and do so sustainably.

3:13:47 And this is adapted from a framework that Hamilton Helmer created in his book Seven Powers. The seven are counter positioning as a startup versus an incumbent. scale economies across a broad customer base. switching costs versus other

3:14:04 near competitors. Network economies. Process power Branding. And cornered resource.

3:14:11 I was really smiling as you were defining that as uh 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.

3:14:26 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.

3:14:44 I guess where I was going with this is I think there's a cornered resource and process power. That the prime contractor industry as a whole has the cornered resources They are the ones that get the prime contracts from the government.

3:14:58 And then the process power. Which I think probably is really legitimate. We talked to some folks In preparing for this. They are incredible systems integrators at what they do.

3:15:11 What did you say there are four thousand or three thousand subcontractors for the F thirty five? Something like that. It's nuts. To orchestrate that and coordinate that into an airplane that does the things that that airplane does in practice. That's hard. I can't believe it's not all made by the same company. The fuselage is made by a different company than the wings, are you freaking kidding me? And that thing works? Didn't you say that different parts of the fuselage are made by different companies?

3:15:34 Yes, on different continents. Yeah. There's definitely process power in that. You can't just pick that up out of Lockheed and go put it somewhere else and expect it to function. Right. Yeah, there's a hundred years of know how and fifty years of very well honed ways of engaging with the customer here. The customer again being the pedagog. Right. The customer. It's like big brother, the customer.

3:15:58 I think you're right that we should think about it as the Primes versus everyone else. It's really hard to become a new prime. Yeah. Maybe impossible?

3:16:09 You know Palantir has sort of done it, I guess. Andrewell is kinda doing it. But these I think are still pretty small scale compared to The big primes. The fifty billion dollars of spend that the one customer has with the one company.

3:16:26 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.

3:16:36 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 customers absorbing all the fixed cost stuff too. switching costs, I guess, but every time there's a new program they rebid it out and the government's typically excited to give it to not the incumbent because they actually they want to rotate these programs around.

3:17:03 So fighter jets are typically not made by the same company two generations in a row, although Lockheed Martin has sort of shown with the F twenty two and the F thirty five that They have won that. I think you're right on process power broadly, but is Lockheed Martin's process versus Northrop Crown's process? No.

3:17:21 Branding I don't think matters here really. I mean, in cost plus contracting, you're just actually not willing to pay more to one company than the other. So uh cornered resource. No. Not versus each other. Yeah. Right. So there really isn't power.

3:17:39 Yeah. within the industry, but to the extent that you have already become one of these five. Then together the five have power versus new entrance. Which is so funny, you know, you really I think kinda nailed it at the beginning when you said this isn't a market. It's not a market.

3:17:53 And I guess duh, obviously it's not a market,'cause there's only one customer. You can't really have a market when there's only One player on one side of it. Yeah.

3:18:03 That's all I got for power. Yeah, me too. So as we drift into playbook, I think the lens I kinda wanna 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.

3:18:18 One of the big ones is that Lockheed Martin has a dual purpose for existing. There's all the normal stakeholders involved, customers, employees, and shareholders that they want to produce value for. But But there's this second thing. Where they exist for the good of America and its interests.

3:18:36 Which causes some interesting second order effects and one being What is the optimal number of competitors in the space? The government tries to optimize this as a heavily interested party. But before nineteen ninety three, there were way too many competitors.

3:18:52 After nineteen ninety eight, they determined we don't want to have any fewer competitors. But it's sort of odd that there is a force that is not the market. that is dictating how this plays out. because that force, in this case, the US government. is sort of in charge of all of our well being in a way where they don't trust that the market

3:19:15 Well Look out for that. And when I say that I mean If you left a free market To play out.

3:19:22 what would happen is A, you'd sell arms to our enemies. Which the government doesn't want. B, a bunch of companies would put each other out of business and we might lose our industrial base, people would start outsourcing to other countries. We would

3:19:40 potentially lose capability if the government stopped buying it for 10 years, but we wanted it ten years later and we got in a war. Oh, this almost happened, right? The government didn't let Lockheed go out of business in the nineteen seventies. This was right as The Kenan satellite project was getting going.

3:19:57 We could not let Lackhead go out of business because We needed that. Right. So A market cures a lot of problems.

3:20:06 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.

3:20:17 And so the government has to put their hand on the scale in all these different ways in this market. For that reason. Yep. Well, globally competitive is an interesting way to pray, uh safe and globally dominant. Maybe let's put it that way. That's probably the right way to put it. There's a second thing here, which is

3:20:35 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.

3:20:48 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.

3:21:07 Yeah, this gets into sort of the like arguments for and against the military industrial complex generally. So there's this like A Keep the industrial base strong. It's good that we have this big spend on industry because like we need to have lots of people employed there and know all this stuff.

3:21:24 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

3:21:38 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, Prophets 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. Uh, is the Prophets of War book.

3:22:06 Right. So this is an excerpt from that book. The irony is that Almost any other form of spending, from education to healthcare, to mass transit, to weatherizing buildings, even a tax cut creates more jobs than military spending. And

3:22:23 That just falls on deaf ears over and over again with these programs, F twenty two 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 thirty five. It's like, ooh, good, jobs for Americans. And like that is a terrible reason to fund something. Right. It's kinda like I'm thinking about the recent period in. tech companies in Silicon Valley that we are

3:22:47 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

3:22:58 Why, you know? That was the equivalent of the F thirty five. Yeah, like 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 nineteen sixty one in 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.

3:23:31 exists and will persist. 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

3:23:42 Military spending. overran the whole rest of the economy. Clearly as we're talking about here, like Yeah, I think I'm not going to be able to This is a nuanced issue and certainly a lot of degree of non market based Dynamics are warranted here.

3:23:56 But you can't let the military industrial complex get so big it overruns the rest of the economy. That would not be good. The other thing I was gonna say is I think the end of that quote or speech, or at least part of it is You know, Eisenhower sort of I think very naively puts forth

3:24:10 The solution is uh what does he say, like an engaged and vigilant citizenry, you know, a populace. Especially this day and age where things are so complex. That's kinda not possible. You know, is the average person really gonna dive into the details of how the F thirty five program works. Like

3:24:28 No. Right. That's not a good outcome either, if everyone's preoccupied in keeping an eye to make sure big complex doesn't get too complexy. Right. Yeah. There's another one I've been thinking about, which is a parallel to our SpaceX episode, where if you'll remember on the SpaceX episode We talked about, and gosh, that was a lifetime ago, three years.

3:24:48 About how NASA prioritized safety over everything else. And so they took that to such an extreme where things could happen on a twenty year time span. Instead of a five year time span.

3:25:03 And SpaceX came in and said, What if we do it on a two year time span? And we figure out how to be much more iterative in our development and we're happy to explode some rockets not with people on them. And you sort of take this again much more Silicon Valley approach. to rapid iteration, testing your own prototypes internally.

3:25:21 being okay showing off your failures and gathering data from them. Whereas NASA couldn't do enough calculations before it finally was willing to do something to let something go to a launch pad and that would cause extreme delays, massive budget overruns. And at the end of the day, it actually wasn't safer. That's the important thing here. In a hundred and thirty or whatever it was space shuttle missions.

3:25:45 There were two that were tragic loss of life calamities. And so you look at that You're like, that's actually not a great safety record. So Maybe this isn't the right way to do it. Maybe calculating something to you know, fifteen significant digits of unlikely to fail

3:26:02 Is not actually the best outcome. And it sort of seems like the same thing in the military industrial complex where We're willing to sign a contract for airplanes that we get in twenty five years. Because there are these like

3:26:16 Big huge productions. And It's just the opposite of the Skunkworks way of operating where Test your own prototypes. Do it rapidly, start moving up and up and up.

3:26:28 Crash some planes in the desert. But overall we're gonna get to the same outcome. much faster on a much lower budget and maybe with equivalent or better safety. A hundred percent. Well, I can't think of a better

3:26:42 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

3:26:54 The Heyday, glory days, whatever you want to call it. Of Lockheed. Both with Skunkworks and LMSC.

3:27:03 Of how these small Skunk Works type organizations. Achieved. Unbelievable. Unfathomable things.

3:27:15 With a small number of people In an unrealistically tight time frame. with very constrained resources. And That mindset is

3:27:25 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.

3:27:35 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 a

3:27:47 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

3:27:58 Achieve something great bordering on impossible. In a Tight bordering on unreasonable time frame. Kelly's fourteen laws and LMSC seven tenants are a pretty damn good way to do it.

3:28:12 That's so true. Otherwise you get to this thing that Norm Augustine said, how unbelievably expensive these things get if you do it the non-skunkworks way, and we just move into this larger and larger morass that we're sort of the direction we're basically going in in these twenty five year programs. And he says, in the year twenty fifty four, 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.

3:28:46 Truly. But the craziest thing is much like Moore's Law, he accurately predicted the rate at which aircraft prices would continue to grow starting way back in nineteen eighty three. He actually wasn't far off on the F thirty five. on sort of his prediction on how expensive it would be on the cost curve. To exactly your point. If you continue at current course and speed, We basically will have only billion dollar airplanes going forward. They'll be made by

3:29:13 everybody there will be no new entrance. Innovation will happen very slowly. Very slowly. When you look at Lockheed Martin as a business, they're gonna do just fine for a long time. No doubt about it. They're an incredibly protected, insulated business with an unbelievably wedded to them customer. And

3:29:33 the creative destruction cycle will happen on other frontiers. Yeah. There will be some existential need to create something that these companies are bad at creating and that the US government doesn't know how to buy from them. And the United States will have to figure it out another way. And whether that's cybersecurity or whether that's information warfare or whatever it is, whatever threatens the American way of life. I have pretty high confidence the American government will figure out some way to make sure that we prepare for that.

3:30:03 issue, whatever that issue is. And It may or may not be from one of these companies. And it's very likely that the Skunk Works mentality ends up solving more problems for our country, but probably not from the Skunk Works division of Lockheed Martin.

3:30:18 And 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 coronavirus. 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.

3:30:42 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.

3:30:55 Creates threats. It's not always competition that leads to a threat. Human beings and organizations tend to perform at their best.

3:31:08 In response to threats. Otherwise, how are you gonna be motivated to go to unreasonable extremes if you're not facing a threat? Yeah. No, I like that nuance. Which is kind of a you know, to this playbook of like I certainly don't want to say artificially manufacture threats, but if you're building a company

3:31:27 Certainly this exists in startup world. You you have an implicit existential threat all the time as a startup. before you reach cash flow profitability, which is like You gotta make payroll. And you gotta like either get profitable or raise another round of funding, or you're done. Yeah, I think you're right. I think we're quickly sort of teasing out there's sort of like two different things here. It's

3:31:48 Lockheed Martin exists. to ensure the Americaness 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.

3:32:02 And I have no doubt that will continue happening. And also there will be other motivations for people to form tight knit teams and accomplish great things and like those are gonna be for other threats and happen by other groups of people. And I want to hear your thoughts on that. Maybe this is the place to leave it. Rather than grading this time, let's come up with kind of the main takeaway, but I'm curious what you think.

3:32:22 I like that a lot. It's probably a good thing that the Nature of that motivation and the uh introduction of those threats to spur human Ingenuity and creativity. Has moved.

3:32:35 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, or most people at least. Uh right now, mercifully.

3:32:48 Thankfully. And That mindset was directly transferred from Lockheed and the military into Silicon Valley.

3:32:56 That's how Silicon Valley operates today. And that's what makes it special. And it doesn't have to be because of threats of war, and it's a good thing that it's not. All right. I think that's the right place to leave it. You want to do carve outs?

3:33:08 Yeah, let's do it. My carve out. Is a Fun one I was reminded of because my Favorite.

3:33:16 video game history podcast series, Resident 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

3:33:29 The series that Resident Arc is in the middle of is there. video game storybook club going through it. It's both a really fun game to play. And was kind of ahead of its time.

3:33:39 The sort of theme of the game is all about Can machines think and feel? And what does that look like? And like oh it was like really thought provoking at the time. It's particularly thought provoking right now in our era of, you know, open AI and

3:33:53 GPT and generative AI and all that. So it's really fun to revisit that. Along with The great resonant archives right now. Talking about the themes of that story. Nice.

3:34:04 You'll have like a whole niche of people there. Listening to your carve outs for video game. Mm-hmm. Video game rex. Totally.

3:34:12 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 SR71, you should Google the SR71 Blackbird Speed Check Story. is an awesome story that I'm not gonna spoil for you. But it's uh About

3:34:31 pilot jocks at their finest and uh a triumphant blackbird. It's a joy to read. It takes like two minutes. I think you'll like it. We'll also link to it in the show notes. The second one I have. is very, very

3:34:44 boring carve out, but something I found surprising. Ego Lawn tools. EGO is the brand. They make effectively the Tesla of lawnmowers.

3:34:55 And growing up I had like a big gas lawnmower and you'd like pull a cord to start it and it was loud and it was Smelly and it was dirty and it was like gas. And These are battery powered lawnmowers that are Insanely powerful. I have a leaf blower also that lasts like thirty minutes off of just a battery.

3:35:13 Look at you. You are just becoming a dad. I'm finding some like very good catharsis in I just throw on uh audio book and as I'm researching an acquired episode and like go do lawn work for six hours. And I find that to be like Greatly gratifying to get away from a screen. I've chosen to go the uh hire gardeners route on this. Uh you can you also have a A two year old. So that takes more of your time. Well, and the nature of a yard in San Francisco is a little different. I'm not sure I'm capable of maintaining my yard, uh, given everything that's back there. It requires more technical expertise. More systems integration. More systems integration.

3:35:52 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. acquire.fm slash L P And when I get back from uh Berkshire, I think we'll do a an L P call here in the next month or so.

3:36:08 You should totally check out ACQ2 if you like hearing us interview other people. I can assure you the next few interviews are going to be Oh, they are gonna be Great. Even the ones that are live now, the one we just did with Jake. The one with Ovlock from Angel List, the one with David from Retool, Fantastic, Kamakshi.

3:36:29 with her company Samuha, all like really fascinating discussions. Look up ACQ two in any podcast player. Now that you're done with this episode Come discuss it with us. Acquire.fm slash slack. We'd love to have you. And particularly too.

3:36:43 I think there's a good chance with this episode that we'll have a lot of New to acquired folks who are listening. Wait. Unexpectedly had that in huge numbers with our L VMH episode. All sorts of new people.

3:36:56 coming in and experiencing a choir 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. And I just want to second what Ben said. Join the Slack and come talk about it with us. We love hearing from people. You know, we're obviously not in the defense industry. We love hearing from people who are Tell us about your experiences, what it's like, what we got right, what we got wrong, and educate all the rest of us in the community too. Yep.

3:37:23 Seriously. Alright, without listeners, we'll see you next time. We'll see you next time. Who got the truth? Is it you, is it you, is it you Who got the truth now?

3:37:34 Oh.

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