30 May 2023 · 3h 38m · 30 quoted facts
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Ben and David argue that Lockheed, the federal government's largest contractor, was forged by existential threat: World War II and the Cold War drove tiny, empowered teams — Kelly Johnson's Skunk Works and the secret Missiles and Space division — to near-impossible feats like a jet fighter prototype in 143 days and the U-2 in eighteen months. Most of what they built were deterrents designed never to be used, and the same culture seeded Silicon Valley itself.
The defining tension is decline from ferocity to protected stasis. The company that delivered the U-2 for $3.5 million became, after the 1993 'Last Supper' forced consolidation, one of five primes living on cost-plus contracts from a single customer — margins capped near 8%, programs spread across 46 states so Congress cannot say no. The hosts conclude there is no market here at all, and the Skunk Works mindset now lives in startups instead.
Kelly Johnson's handpicked team built the P-80 jet prototype in 143 days in a rented circus tent and delivered the U-2 in about eighteen months for $3.5 million. His 14 rules — viciously restricted headcount, total program authority, designers steps from the shop floor — worked because World War II and the Cold War supplied motivation no management system can manufacture.
Lockheed Missiles and Space moved into Stanford Industrial Park in 1955 and employed 30,000 people by the mid-60s — ten times Hewlett-Packard's 3,000. It built Sunnyvale from a town of under 10,000, bought from the new chip startups, and employed Jerry Wozniak, which is why Steve Wozniak, and therefore Apple, grew up in the Valley.
The first Corona mission in August 1960 produced more Soviet photo coverage than five years of U-2 flights combined, returning film in buckets caught midair by C-130s. David argues the celebrated SR-71 was partly a decoy, and LMSC was the real crown jewel: from 1960 to 1972 it generated 128% of Lockheed's profits while the rest of the company lost money.
After the Pentagon's 1993 'Last Supper' dinner explicitly ordered contractors to merge, 17 companies collapsed into Lockheed Martin, which now gets about 75% of its $66 billion revenue from one customer at contractually capped ~8% net margins. The hosts' Seven Powers analysis fails outright because with a single buyer and rotating awards, there is no market — only power against new entrants.
The F-22 program shrank from 750 planned planes to 187 delivered while the $62 billion cost stayed fixed, reaching roughly $360 million per aircraft. Building the F-35 across 46 states with 95,000 jobs turns Congress into 538 principal-agent problems that reliably vote yes, confirming Norm Augustine's prediction of ever-costlier planes.
Skunk Works was Lockheed's secret, small-team engineering group led by Kelly Johnson. It built the P-80 jet fighter prototype in 143 days, the U-2 spy plane, and the SR-71 Blackbird, using few people and very little red tape.
Lockheed's Missiles and Space division moved into Stanford's industrial park in 1955 and built a large campus in Sunnyvale. It employed tens of thousands of people and bought electronics from local startups, and the hosts say it passed Skunk Works management ideas to the Valley.
On May 1, 1960, the Soviets shot one down with a missile and captured pilot Francis Gary Powers. Continued flights would have risked war, so overflights stopped, and spy satellites took over the job.
In July 1993, Deputy Defense Secretary William Perry told defense CEOs that spending would shrink massively and that they should consolidate. The Martin Marietta CEO called the dinner the last supper, and mergers followed, including Lockheed Martin in 1995.
The hosts say the Pentagon is the only customer, and cost-plus contracts cap profit at roughly 8% of revenue. Work is also spread across 46 states for political support, so normal competition and scale advantages do not apply.
Stated by the speakers. Each quote matches the transcript, which shows what was said, not that it is true.
Robert Gross bought the Lockheed division out of the Detroit Aircraft Corporation bankruptcy for $40,000, a price so low that founder Alan Lockheed considered bidding to buy it back.
“this price that he bought it for, $40,000, was so low that Alan Lockheed actually considered bidding to buy his company back”
Kelly Johnson won the Collier Trophy twice, which the hosts describe as one of only two people ever to do so.
“Kelly ends up winning the Collier Trophy twice, one of only two people to do so in history.”
Before the United States entered World War II, Britain's Royal Air Force bought about 3,000 Lockheed Hudson bombers.
“the British Royal Air Force ends up buying about 3,000 of these Hudson's from Lockheed.”
Lockheed built over 10,000 P-38 Lightning fighters during World War II, and the top U.S. Army Air Corps aces flew them.
“They made over 10,000 of them during the war, and all of the top aces in the U.S. Army Air Corps flew them.”
Kelly Johnson's Skunk Works team built the Lulu Bell, the first US fighter jet prototype, in 143 days.
“Kelly and this super elite team from Lockheed build the first prototype U.S. fighter jet named the Lulu Bell in 143 days, start to finish.”
To meet the 180-day deadline, Lockheed used a Halford H-1B Goblin engine from a British company in its first jet fighter prototype.
“So they find this British company, Halford, and they take the Halford H-1B Goblin engine, and that is what they put in this prototype.”
The Soviet Union detonated its first nuclear bomb in August 1949, sooner than many Americans expected.
“In August 1949 the Soviet Union detonates its first nuclear bomb bomb”
The CIA specified that Skunk Works' U-2 spy plane must fly at 70,000 feet.
“So the CIA's spec for Skunk Works for the U-2 is to fly at 70,000 feet.”
Skunk Works delivered the U-2 by July 1955, about a year and a half after starting, for a total project cost of $3.5 million.
“Skunk Works completes and delivers the plane by July 1955. So like a year and a half and for a total project cost of three and a half million dollars.”
Edwin Land and the Polaroid Company designed the new camera system for the U-2.
“And that was Dr. Edwin Land and the Polaroid Company who subcontracted and created all of that.”
Skunk Works chose the dry lake bed at Groom Lake, Nevada, as the test site for the U-2, the origin of Area 51.
“So they find a dry lake bed in Nevada called Groom Lake.”
On May 1, 1960, the Soviets shot down a U-2 with a missile that could reach 70,000 feet.
“the Soviets finally have developed a missile that can reach 70,000 feet with accuracy.”
Khrushchev announced on the eve of a Paris summit with Eisenhower that the Soviets had captured the American U-2 pilot, Francis Gary Powers, and the plane.
“Khrushchev announces on the eve of the summit that they have captured an American pilot, they have captured this new plane”
Frederick Terman, who ran Harvard's wartime radio research lab, was a Stanford professor on loan to Harvard.
“Terman was a Stanford professor. He was just on loan to Harvard during the war years because that's where the government set up the radio labs.”
The Stanford Industrial Park, now the Stanford Research Park, was carved out of the Stanford campus and leased to companies.
“It's initially called the Stanford Industrial Park. Today it's called the Stanford Research Park.”
Lockheed bought 275 acres in Sunnyvale, California, and built a campus with 137 buildings.
“they also buy 275 acres just down the road in Sunnyvale and they build a huge campus there, 137 buildings.”
Jerry Wozniak, father of Steve Wozniak, moved his family to Silicon Valley to work as an engineer at Lockheed Missiles and Space Company.
“Jerry Wozniak, who moved himself and his young family out to this new Silicon Valley to become an engineer at Lockheed Missiles and Space Company.”
The Lockheed Polaris A-1 missile, fired from submarines, could reach land targets up to 1,200 nautical miles away; the first Polaris submarine began its patrol in 1960.
“Equipped with Lockheed, Polaris A-1, undersea-fired nuclear warheads, ballistic missiles, could reach land-based targets up to 1,200 nautical miles away from wherever the submarine was when it launched it.”
The first Corona reconnaissance satellite, launched in August 1960, could photograph ground locations at a resolution as low as five feet.
“this first Corona satellite had a camera system on it that was able to photograph any ground location that it passed over in its orbit around the earth at a resolution as low as five feet from space.”
Corona film capsules descended by parachute and were designed to be caught in midair by an aircraft towing a claw.
“The capsule is designed to be caught in midair by a passing airplane towing a claw.”
Corona film capsules that landed at sea had a salt plug that dissolved after two days, sinking the film if the Navy had not retrieved it.
“there's sort of a self-destruct mechanism where there's a salt plug in the base that dissolves after exactly two days”
From 1960 to 1972, Lockheed Missiles and Space accounted for over a third of Lockheed's revenue and 128% of its profit, per the hosts' figures.
“LMSC accounted for over a third of that revenue and 128% of the profit.”
The SR-71 Blackbird was built from titanium because the airframe heated to hundreds of degrees at Mach 3 speeds.
“So they had to build the whole plane out of titanium to make this work.”
The SR-71 Blackbird's first official flight was on December 22, 1964, reaching a top speed of Mach 3.4.
“So the first official flight of the Blackbird happens on December 22, 1964. It reaches a top speed of Mach 3.4.”
In 1970 the Pentagon canceled further SR-71 orders and ordered Skunk Works to destroy the titanium tooling.
“In 1970, the Pentagon cancels further orders and they order Skunk Works to destroy all of the titanium tooling for it so that no more can ever be built.”
Lockheed's L-1011 airliner project lost the company $2.5 billion.
“the L-1011 airliner project loses Lockheed $2.5 billion.”
The Air Force bought 59 F-117A Nighthawk stealth fighters from Skunk Works at $43 million each, starting deliveries in 1983.
“They ultimately buy 59 of them, of the F-117A Nighthawks, at $43 million each.”
In July 1993, Deputy Defense Secretary William Perry told defense CEOs at a dinner that defense spending would shrink massively and that they should consolidate.
“at which he explicitly tells them defense spending is going to shrink massively.”
The F-22 Raptor program fell from a planned 750 aircraft to 187 delivered, while total program cost stayed about $62 billion, per the hosts.
“187 planes delivered they kept the $62 billion total program cost fixed”
Lockheed Martin's total revenue was $66 billion, of which $50 billion came from the US federal government, per the hosts.
“66 billion dollars was Lockheed's total revenue last year of which 50 billion came from the US federal government”
After the Loughead brothers' early ventures and the Detroit Aircraft Corporation's collapse, Robert Gross buys the company for less than Alan Lockheed's own unplaced bid. Everything Lockheed became traces to this fire-sale founding.
“everything you know of Lockheed today got bought out of bankruptcy for $40,000”
German Me 262 jets panic the Allies, so Kelly Johnson gets 180 days, 23 engineers, and a tent beside a plastics factory. The result establishes the Skunk Works name, rules, and legend.
“the first prototype U.S. fighter jet named the Lulu Bell in 143 days”
With the CIA rather than the military as customer, Skunk Works delivers a 70,000-foot spy plane with custom Shell fuel, spacesuits, and Edwin Land's camera. It becomes arguably the best deal the government ever got.
“A year and a half and three and a half million dollars”
Soviet missiles finally reach altitude, Khrushchev ambushes Eisenhower before the Paris summit, and overflights of the USSR end forever. America is suddenly blind, setting up the secret pivot to space.
“the first time in history that a ground-to-air missile had shot down an airplane”
Back from Harvard's wartime radio lab, Terman recruits radar talent to Stanford with instant tenure, liberalizes tech transfer, and frames spinning out companies as national service. The Valley's ethos was built, not innate.
“It's all thanks to Terman and World War II”
The Missile Systems Division moves to Stanford Industrial Park, buys 275 acres nearby, and grows to 30,000 employees — ten times HP. Its hiring even brings the Wozniak family to the Valley.
“Lockheed built Sunnyvale”
The secret satellite program instantly outperforms years of risky overflights, with C-130s snatching parachuting film canisters midair and salt plugs sinking missed ones. It stayed classified until 1995.
“greater photo coverage of the Soviet Union than all of the previous U2 flights”
Titanium bought from the USSR through dummy corporations, fuel that leaks on the tarmac, and spike-inlet superchargers produce the fastest air-breathing plane ever. Yet David argues satellites made it partly a decoy.
“It cannot turn around in the state of Ohio.”
A Russian math paper yields the faceted Hopeless Diamond with a ball-bearing radar signature. Rich defies Kelly Johnson's advice and industry norms by self-funding the prototype, winning the F-117 and $2.5 billion Lockheed desperately needed.
“I want to pursue this and make a prototype anyway without a research contract”
In July 1993, Deputy Defense Secretary William Perry tells contractor CEOs the budget cannot feed them all. The resulting merger wave creates Lockheed Martin and ends defense as a competitive industry.
“you all need to consolidate and start merging with one another”
Cost-plus contracts leave taxpayers holding the bag as fleets shrink and unit costs balloon, while distributed jobs make cancellation politically impossible. This is the structural opposite of Skunk Works economics.
“congress can kind of be simplified to 538 principal agent problems”
The hosts land on their thesis: existential competition drives peak human performance, and the small-team culture Lockheed forged migrated out of defense. Its true heirs are startups, not today's primes.
“that mindset was directly transferred from Lockheed and the military into Silicon Valley”
Those two movies are so freaking good. Yeah. It's so shocking how good Maverick is. So many years later in such a different environment and then like delayed due to coronavirus. Well, the funniest thing is when it was delayed for whatever years during coronavirus, the fighter that Maverick is in is an F-18 Hornet, the Boeing plane. And by the time the movie gets released, it's basically discontinued. Within a couple of years, that's when they end of life the F-18 Hornet for the Navy.
Yeah. Did you catch the Lockheed thing in Maverick? The skunk on the tail of the plane. Oh, yeah. On the Mach 10 Dark Star aircraft. The Mach 10 Dark Star. Oh, God. All right. Let's do it. All right. Let's do this. Who got the truth? Is it you? Is it you? Is it you? Who got the truth now? Is it you? Is it you? Is it you? Sit me down. Say it straight. Another story on the way.
Who got the truth? Welcome to Season 12, Episode 5 of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert. I'm David Rosenthal. And we are your hosts. Today's episode is on a critical piece of American infrastructure, Lockheed Martin. They are the nation's largest defense contractor. They're actually the federal government's largest contractor, period. The American taxpayers pay Lockheed Martin around $50 billion a year. And just to state this early and clearly, Lockheed Martin makes, among other things, killing machines.
The company is, of course, critical to defending the American way of life. And most of these things they make, fortunately, are used as deterrents to keep peace. But we should not mince words. They make weapons synonymous with phrases like overwhelming force and air superiority. You may feel, and probably should feel, conflicted as you learn about this company. There are really no easy answers to the question, is what they make right or good? And that's why we entrust the decision to use their products to the office of the President of the United States.
But this company's history is absolutely fascinating. There's stories of hardcore engineering, daring innovators, and it's frankly just inspiring. Yeah. Going back and learning all this and soaking in the history of the times when Lockheed was really forged gave me at least a whole new perspective on this killing machines and deterrence question. To tell the full story of Lockheed and Lockheed Martin and all the predecessor companies that came before it, because I think it's like 17 companies all merged together at this point, would probably require a full season of Acquired, so we're not going to do that.
Instead, we're going to focus on two interwoven stories from Lockheed, not Martin, but Lockheed's Golden Eras. And the first of those stories is the famous Skunk Works. The second one, I'm not going to say what it is so we don't spoil it just yet, but as a teaser, it's unbelievable and is directly tied in to the birth of Silicon Valley. So if you're in the tech world and you think Lockheed Martin and defense and fighter planes doesn't apply to me, think again, because pretty much everything you do came out of this.
So I can't wait to tell it. 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 anytime at acquired.fm slash LP. If you want more from David and I, you should check out our interview show, ACQ2.
Our last episode was on the topic of how generative AI can be valuable specifically to B2B SaaS companies and probably more importantly, where it cannot. And listeners, you can just search ACQ2 anywhere podcasts are found. We've got some awesome interviews coming up too. ACQ2 is on fire. Yep. Join the Slack, acquired.fm slash Slack. We'll be discussing this episode there afterwards. And without further ado, David, take us in. And listeners, as always, this show is not investment advice.
David and I may have investments in the companies we discuss. And this show is for informational and entertainment purposes only. So for many of you listening, one thing you may not know that I didn't really know till we started the research is that the company that eventually became Lockheed Martin today was two companies. It was Lockheed and Martin Marietta. And there was a huge merger in 1995. Lockheed was actually the second Lockheed company or really maybe the third.
The first Lockheed company was founded in 1912 by one Alan Lockheed. But if you were to look at the spelling of his name, it would look like Loghead. L-O-U-G-H-E-A-D. Yes, but it was pronounced Lockheed because it is Scottish like lock, like Loch Ness, Lockheed, not Loghead. He eventually changed his name to Lockheed and the name of the second company to Lockheed to avoid mispronunciations. Which is great. He didn't just rename Lockheed the company. He's like, yeah, I'm actually going to change my own name spelling to match it.
Yes, so great. So he started the first company with his brother, Malcolm, and they were more or less contemporaries of the Wright brothers. It was based in San Francisco, of all places, and it was mostly kind of a tourist attraction. They had one plane, the Model G, and they flew tourists around over the bay and evangelized this new flying technology. It had a bunch of ups and downs. Malcolm leaves the company and goes to Detroit to seek his fortune in the automobile industry where he invented the modern hydraulic brake system for automobiles.
So every time you press the brake in your cars, you're using Malcolm Lockheed's technology. No way. Yeah, super cool. They also end up hiring into this first Lockheed company, one John Northrup. Yes. That name might ring some bells to help them design their future airplanes. John would go on to be a co-founder with Alan of the second Lockheed company, then leave to strike out on his own where he founded the Avion Corporation. It gets acquired by Douglas and becomes a big part of Douglas.
Douglas, of course, is now part of Boeing. And then after that, John, as you might imagine, founded, you guessed it, Northrup, which is now Northrup Grumman. So this one dude was responsible for founding or playing a major role in three of the remaining five defense prime contractors today. But anyway, the first Lockheed company goes under. They start the second one a few years later. They have some success with the Vega airplane. People might be familiar with that.
It becomes a favorite of Amelia Earhart and Wiley Post, famous early aviators. It becomes successful, this second Lockheed company. They end up selling it to a consortium of Detroit auto moguls, maybe through the relationships from Malcolm or something, that have formed the quote unquote Detroit Aircraft Corporation or the DAC. This is including Charles Kettering, the founder of Delco and head of research at GM as part of this. You may know Memorial Sloan Kettering. Exactly. Same dude.
So the idea was they were going to build the general motors of the air. There was just one problem with that is that aviation did not become a consumer industry like the automobile industry. Alan Lockheed departs at this point in time and is kind of tangentially involved. But this company that to this day bears his name after this point in time, he doesn't really have a lot of impact on. Now, shortly after this maybe harebrained GM of the air idea comes together and Lockheed gets sold to the Detroit Aircraft Corporation, the stock market crash of 1929 and the Great Depression happens and DAC predictably goes bankrupt.
They sell off the Lockheed division, which is actually still fairly profitable, out of bankruptcy to an entrepreneurial young businessman named Robert Gross. And this is really the founding of the modern Lockheed. And the craziest thing, this price that he bought it for, $40,000, was so low that Alan Lockheed actually considered bidding to buy his company back when they had it on the auction block. And his considered bid was $50,000. But he thought that is so low that it might be insulting.
There's no way they'd ever sell it. So he didn't actually bid. And the winning bid was $10,000 less. It's so amazing when everything you know of Lockheed today got bought out of bankruptcy for $40,000. It's crazy. So under Robert Gross and his brother Cortland, who gets involved, they really are the ones who turned Lockheed into the great company it became. So before World War II, during the 30s, Lockheed builds the famous Electra airplane, which is absolutely iconic.
This is the plane that Amelia Earhart disappears in. And perhaps even more timelessly, this is the plane at the very, very famous scene at the end of the movie, Casablanca, when Rick puts Ilsa on the plane with Victor to escape the Nazis and says, here's looking at you, kid. That plane is an Electra. I believe an Electra Jr. And listeners, you know this plane. It's one of those romantic early aircrafts that were always sort of perched up at an angle where if you saw it standing still on a runway, it looked like it could just take off at any moment.
Oh, absolutely beautiful. The Electra and Casablanca brings us to the first core part of our story, which is World War II, which transforms everything. And a man named Clarence Kelly Johnson, who started the famous Lockheed Skunk Works division. And this is great because before I started the research, I was loosely aware that Lockheed had the first Skunk Works. Now it's become almost like Kleenex when someone says Skunk Works. Oh, we're going to start a little Skunk Works division.
And like it was not a thing until Kelly Johnson started the Skunk Works. So there's a wonderful book. There are a bunch of wonderful books around Lockheed, but a book titled Skunk Works that was written by Ben Rich, who was Kelly's second in command for a long time at Skunk Works and then took it over when Kelly retired. And this book is like the Top Gun of historical autobiographies. You read it and you are just fired up.
It is amazing what these people did. It's Top Gun for engineers. Yes, it's so great. I also highly recommend a book called Beyond the Horizons, which is hard to find and most people don't know about by Walter Boyne. And that is an amazing history of Lockheed during all these eras that we're going to talk about. David, that's so mean. You're recommending an out of print book to people. We keep doing this. This one, I think I only paid like 40 bucks for on Amazon.
So it's not quite like Taste of Luxury and LVMH, which I think that's now like three, four or five thousand dollars. Oh, yeah. No, we definitely spiked the price. We did. All right. So who is this Kelly Johnson? He's basically the Shigeru Miyamoto of airplane design. His nickname is Kelly because when he was in grade school growing up in Michigan, his real name was Clarence. An older boy called him Clara on the schoolyard. And Johnson attacked him so viciously that he broke this kid's leg.
And so after that, all of his schoolmates never called him Clarence or Clara again, and they nicknamed him Kelly. Okay, so not Clara, but why Kelly? There was some character of Kelly, kind of an Irish tough guy that they named him after. That really was his personality. So after every Skunk Works test flight for the rest of his tenure running Skunk Works, they'd throw a big party and Kelly would challenge anyone, all comers, to an arm wrestling match.
And even when he was like 60 years old, he was still beating people. You should Google a picture of this dude. He is just a 1930s man's man at his finest. And maybe the best airplane designer ever to live. That is Kelly Johnson. And when you hear the stories about him, he could intuit the answer to difficult math problems in his head. And not just math problems, but like physics problems and applying Bernoulli's principle in his head and come up with an answer that was 5% off from the actual answer.
And someone else would go spend hours and hours and hours with pencil and paper and slide roll to come to basically the same number. The quote from his first boss, Lockheed's chief engineer at the time, Kelly would become the chief engineer. But his boss at the time, Hall Hibbard, would say, that guy can see the air. So Kelly ends up winning the Collier Trophy twice, one of only two people to do so in history. The Collier Trophy is the equivalent of like the Oscar for best picture.
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 1933 at 23 years old. And Kelly is really one of the, if not the principal engineer that designs and builds the Electra.
So he becomes the star of Lockheed's then only six-person aviation design and engineering department. There were six people that were making these things. Crazy. And he does basically everything himself. Engineering, designing, testing, even flight testing. There's this amazing quote in Skunk Works. This is Ben Rich talking. Kelly once said that unless he had the hell scared out of him at least once a year in a cockpit, he wouldn't have the proper perspective to design airplanes. So great.
Okay. So the start of World War II rolls around. And the first thing that Kelly and Lockheed do is they adapt the Electra into a bombing vehicle called the Hudson. And even before the U.S. enters the war, the British Royal Air Force ends up buying about 3,000 of these Hudson's from Lockheed. Yeah. This is a thing that was eye-opening to me doing the research. Lockheed's big customer in World War II before the U.S. enters was Britain's Royal Air Force.
They were a way bigger customer than the U.S. was for many, many years. So then once the U.S. enters the war and as they're gearing up to enter the war, Kelly designs the amazing P-38 Lightning Fighter, which was the U.S.'s elite, fastest, most maneuverable aircraft during World War II. They made over 10,000 of them during the war, and all of the top aces in the U.S. Army Air Corps flew them. It was the plane that shot down the transport that was carrying Japanese Admiral Yamamoto, the guy who had kind of masterminded and overseen the Pearl Harbor attack.
This is a legendary airplane. Side note, I will say last week, partly in preparation for recording this, but partly because it's something that I've always wanted to do, I went to Pearl Harbor, and there is truly nothing like being there and experiencing that. Growing up in America, we basically haven't had attacks on our soil. It's 9-11 and Pearl Harbor, period. So it's a very unusual thing to see in your own country the remnants of an attack, and being over the sunken USS Arizona from the Japanese bombing, it's harrowing and heavy.
But I think that that's an experience I'd recommend to anyone. Okay, so that was kind of Lockheed and Kelly during the war. Fast forward now to kind of the waning days of World War II, end of 1944 into 1945. It's pretty clear that America and the Allies are going to win the war at this point in time, but it's also becoming evident that there are two big problems that are emerging. One very immediate, and one sort of longer term.
The immediate problem is that in the skies over Europe, in the air theater of the European front, a new technology is appearing on the German side. Jet-powered fighter planes have begun to pop up. And we're not a military history podcast, save this for Hardcore History and Dan Carlin, but my understanding of this is that the German jet fighters entered the war too late to make a difference. But if they had entered service earlier, it would have been a big problem.
So the U.S. and the Allies, they're like, oh, crap, we need to step up our game and get a jet fleet in service for us ASAP. And for anyone who's not an avgeek out there or an aviation geek, it's worth knowing going from a prop airplane to a jet airplane is not just incremental. It's an entirely different technology. You may have heard the phrase, if you've looked into this before, suck, squeeze, bang, blow. It is a completely transformative process of how the engine uses the air in order to create thrust that is much more sophisticated than just a propeller.
My understanding is the engines that airplanes were flying before then, even the P-38, as sophisticated as it was, were basically automobile internal combustion engines. Totally. So we're observing overseas our enemy has a completely new technology that we have not tamed and mastered yet. We're at a disadvantage. So that's one problem, and we're going to focus on that first. The other problem to put a pin in for later, 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.
And we might have to address that in the coming decades. So keep that in the back of your mind as we go along here. But let's start with the jet problem. So the German plane that had started appearing in the skies over Europe was the Messerschmitt Me 262, nicknamed the Swallow. And it was the world's first operational jet-powered aircraft. It flew close to 550 miles an hour, which is over 100 miles an hour faster than any Allied plane, including the Lightning P-38.
So the U.S. government turns to, of course, the very best person for the job to start the U.S. jet fighter program, Kelly Johnson and Lockheed. And they tell him, go make us a jet fighter as soon as possible and by any means necessary. And when we say as soon as possible, we want to prototype in 180 days. Wow. With the spec that it must go faster than the German Swallow. So at least 600 miles an hour.
You need to pull out all the stops, bypass any red tape, do absolutely anything necessary to make this happen. And for those tracking along at home, 600 miles per hour, not quite the speed of sound, not quite Mach 1, but approaching that. Something like 80-ish percent to Mach. Yep. So Johnson handpicks 23 of Lockheed's very best engineers and designers and about 30 of the best shop people, the people that actually build the airplanes. And get this, he rents a literal circus tent to house them in the parking lot next to a plastics factory that is nearby to Lockheed's headquarters in Burbank, California.
And it is because of this that the name Skunk Works is born because of the outdoor nature in the tent and the smell coming from this plastics factory. At the time, there was a very popular comic strip called Little Abner. And a character in this comic strip had a outdoor moonshine still making bootlegged prohibition era alcohol. And this still in the comic strip was called the Skunk Works. I think it was called the Skunk Works. That's right.
The Skunk Works with an O. And eventually the publisher of Little Abner sues Lockheed over using Skunk Works. So they change it to Skunk Works. So in this circus tent in a parking lot, Kelly and this super elite team from Lockheed build the first prototype U.S. fighter jet named the Lulu Bell in 143 days, start to finish. This is just wild. For years, the U.S. had been working on this technology and they hadn't gotten it operationalized.
The Germans beat them to it. And then in 143 days, Kelly and Lockheed go from zero to flying prototype. Wow. Crazy. What a testament to him and to this organization in the circus tent that he has built, the Skunk Works. Seriously. So this 180-day thing is a very interesting constraint placed on them. And it means that they immediately need to go to an acquired axiom that we've talked about forever. Don't do something that's not your core competency.
AKA doesn't make the beer taste better or make the plane fly faster. Exactly. And outsource everything else. And if you only have 180 days to do it, you are not going to become an engine manufacturing company. You are going to look around and say, 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-1B Goblin engine, and that is what they put in this prototype.
Yes. This prototype, the Lulubel, would go on to become the P-80 shooting star. Lockheed would ultimately make about 2,000 of them. And while they weren't really used in World War II because the war ended, they would be used in Korea, and it would be the first jet fighter plane in the U.S. military. You raise a really important point, though, that we didn't cover earlier about Lockheed and Skunk Works. They are not engine manufacturers. All of the engines that were going into the planes before, during, since, they're getting from other companies.
And that is true across the aerospace industry. That's interesting that the value chain evolved this way, where basically no aircraft manufacturers to this day make their own engines. 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 amazing feat, building what becomes the P-80 shooting star and the U.S.'s first jet fighter plane in less than six months, this is the beginning of Skunk Works.
And Kelly realizes, hey, this is something pretty special here. So I want to read a little quote from the Skunk Works book. That primitive Skunk Works operation set the standards for what followed. The project was highly secret, very high priority, and time was of the essence. The Air Corps had cooperated to meet all of Kelly's needs and then got out of his way. And boy, did they deliver. So the P-80 would eventually give way to the F-104 Starfighter, which was another invention from Kelly and the team.
Kelly would win the Collier Trophy for this. So after the war, Kelly says, hey, this is special. We should keep this going. And the Gross Brothers and Lockheed's management agree. And they say, yes, you can keep this quote unquote Skunk Works division going as long as it doesn't take too much money and it doesn't distract from your duties in the rest of the company as now the new chief engineer. So Kelly is both the chief engineer of all of Lockheed and running Skunk Works at the same time.
It's insane. This not taking too much money thing does become a core tenet of the Skunk Works operation because you can sort of get around management's ire and management's need to report to shareholders and things like that if you're doing amazing things and pulling rabbits out of hats. And when it's not going well, you're not a huge burden. Yeah. So I'm gonna read a little more from Skunk Works here. So Kelly and his handful of bright young designers that he selected took over some empty space in building 82.
This is a building on the Lockheed campus, which is right next to the Burbank Municipal Airport. It's an unmarked building. Literally, like, this is a commercial airport that average people are taking off of every single day. So 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 would borrow the best people he could find in the main plant to get the job done.
That way, the overhead was kept low and the financial risks to the company stayed small. His small group were all young and high-spirited who thought nothing of working out of a phone booth if necessary, as long as they were designing and building airplanes. All that mattered to Kelly was our proximity to the production floor. A stone's throw was too far away. He wanted us, the engineers and designers, only steps away from the shop workers to make quick structural or parts changes.
Yes. I love this. I think this is a huge learning. Keeping your designers as close as possible to production so the game of telephone is as short as possible and is incredibly valuable. And having the designers being able to glance up at their desk and see literally the way things are being manufactured so they can say, oh, that looked good in the diagram, but in practice, you have to bring this big thing around over here. Maybe we can make that better the next time we design it.
It's just such a great key insight. The other thing on the small number of people, this gets to the Skunk Works rules. And Kelly created this incredible document, 14 rules, that we'll link to in the show notes. Oh, yeah. The third of which, I mean, they're all incredible, the third of which really applies here. And I quote, the number of people having any connection with the project must be restricted in an almost vicious manner. Use a small number of good people, 10% to 25% compared to the so-called normal systems.
These people should all be together, all of them building relationships, collaborating, working together to produce the very best product. And you see this in products in the future, too. The iPhone, and the iPod. I mean, you read the stories about the early teams there, 6, 8, 10 people. They're all full stack, so there's these unicorns that cross disciplines, and they're 10x, 100x engineers, so you really only need a handful of really good people. All right, listeners.
Now is a great time to talk about a new partner of ours here on Acquired, Lagora, the agentic operating system that is redefining how the world's best legal teams work. Yep. It's sort of obvious that AI is going to 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. 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.
The early Lagora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Lagora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 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, you can learn more at lagora.com slash acquired and just tell them that Ben and David sent you. All right, David, so what makes Skunkworks work? Well, to start, all that mattered, literally the only thing that matters is rapid delivery of superior products. And that was driven by the expedient requirements of World War II, literally saving America and the free world.
And then the Cold War, which is going to come in in a big way in a second here. Listeners might be thinking, isn't all that matters in any business rapid delivery of superior products? Like, why is this new and unique and different? The reality, though, is that that's almost never the case. There's politics, there's personalities. Well, and you rarely have an existential threat that you must cut through all the red tape. It's like Operation Warp Speed, the way that we got the vaccines as fast as we did.
If the world is on the line, what can you do away with in your processes and which people can you hand select to solve it? Competition and existential competition kind of has a way of bringing out the best in people. So, Ben, you already talked about rule three. I want to... Did we pick the same ones? I'm so curious. We got 14 to pick from. Let's see. Let's pick three that we're going to highlight here. We already talked about number three.
What are your others? The next one I want to talk about is the Skunk Works manager must be delegated practically complete control of his program in all aspects. Yeah. I mean, this is like the auteur theory. Like, you have to have a single person's vision and the buck stopping with a single person who has ultimate control and isn't a squeezed middle manager. He's the program manager for any given program that they're working on, any new aircraft.
And also, he's the guy flying to Washington to interface with the government. It's not like he's dealing with the engineers and then calling the sales force and being like, hey, can you go to a steak dinner with our guy in Washington? No, it's Kelly. And at its most productive, Skunk Works, I think was about maybe 50 designers and engineers and maybe 100 machinists and shop people. Like, this is not a large organization. It's crazy. My last one, is the last one of the rules.
Yes, this is one of mine too. Because only a few people will be used in engineering and most other areas. Ways must be provided to reward good performance by pay not based on number of personnel supervised. So Kelly has a quote about this in the book. In the main plant, they give raises on the basis of the more people supervised. I give raises to the guy who supervises the least. That means he's doing more and taking more responsibility.
But most executives don't think like that at all. They're empire builders. This is so important. Yep. Totally agree. And in fact, it's thinking like a capitalist too. I mean, it's really like how can we achieve the most with the least, not how can we achieve a fixed amount with a fixed margin? So there's one more thing that isn't in any of the rules because I think it's just sort of a implicit, unspoken assumption. All of this only works if the small group of people that you've brought together are highly motivated.
And I think the reason this was taken for granted for like all of Skunk Works 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 II and then, you know, having nuclear bombs dropped on it by the Soviet Union. You don't really need a lot of extra cajoling or motivation here. Totally. And you got to think back, this was a time where American superiority was not guaranteed.
I think we have a reasonable amount of complacency today. Americans feel very secure. Sure, there are enemies, but are we going to be fine? Totally. We don't need to think about this that much. We can decide to prioritize other things and have passions and say, yeah, other people can take care of the national good because like, we'll be fine either way. That was not the belief at the time. No. There's this great quote in Skunk Works where Ben Rich tells the story of his first day in Skunk Works where he's shown the U2 prototype.
We're going to talk all about the U2 in a minute here. But literally day one, he's shown the prototype of this top, highly classified, highly secret airplane that nobody can know about. He says, the full weight of government secrecy fell on me like a sack of cement that day inside Kelly Johnson's guarded domain. Learning an absolutely momentous national security secret just took my breath away and I left work bursting with both pride and energy to be on the inside of a project so special and closely held but also nervous about the burdens it would impose on my life.
This is exactly to your point. You know, with great power comes great responsibility here. Yep. 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 II. One was the jets. Skunk Works addresses that with the P-80 shooting star. The other problem is, yeah, we're going to win this war but there's a whole new war that's just about to start.
Yeah, and the war we're coming out of is World War II but of course the Cold War against the Russians is just starting. And this is so hard for us to process today but doing the research I really felt it. I think for a lot of people the stakes and the pressure and the worry about the Cold War was greater than World War II. Yeah, that's a great point. When the Americans entered World War II we had reason to believe that we could come in and win.
The Cold War I think to the American psyche felt very different. I think we had good reason to believe we were not going to win. So right after the war Churchill comes to America and gives his famous Iron Curtain speech in Fulton, Missouri that an Iron Curtain has descended over Europe in the form of the Soviet Union. And then before the end of the decade I didn't really realize the timeline on this. In August 1949 the Soviet Union detonates its first nuclear bomb bomb.
And nobody believed that they were going to have the bomb that quickly or that powerfully. And not only did they have the bomb but whether this was real or not or positioning people really believe that the Soviets and Khrushchev's intention is to use the bomb against America. if they ever believe that they could do so without fear of retaliation that they could knock us out first that they would do a first strike and use nuclear weapons on America.
And this kicks off the Cold War arms race and people probably know and learn about mutually assured destruction and deterrence. This really was the policy of the military and the American government that we need to have capabilities to deter the Soviet Union from launching a first nuclear strike against us by being able to guarantee and have them know that we guarantee that if they do so we will destroy them. So they can't do this because if they do they will be destroyed.
That was the whole policy. And that's like a really scary place to be. This is like if somebody over there in the Kremlin decides one day that they think they can win we're all gonna die. Right. In 1955 there was a national poll that asked the question what do you think you are most likely to die from? And over half of America responded that they thought they were most likely to die in thermonuclear war 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. It is the most important thing. Even more important than your ability to strike and wage war is your ability to know what the current state of the opponent's ability is to strike and wage war. So that means that the battleground is no longer the use of weapons but the intelligence about the existence and positioning of weapons.
And nobody is better suited than Skunk Works to be the U.S. government and military's primary sounds cliche to say but sword and shield during this war. So this brings us to the U-2 spy plane. And this plane serves such an important purpose that ended up being brought into service in 1955 and was only decommissioned in 1989. Yeah, incredible. Now there are many airplane programs that have 10, 20, 25 year time frames. For very different reasons. Yes, that we will talk about in the military industrial complex.
But the U-2 was basically the first time that America found a plane that it could use for a long time and wasn't rapidly replaced by the next best thing. Okay, so it would be really great if, you know, you could fly a plane over Russia and take pictures and understand all this. Because there's no satellites yet. Oh, are there satellites? We'll talk about that a little later. But you can't just fly a plane into Russia and do that.
It's a closed country. The Russians are going to shoot you down if you do it. We're not technically at war, so it would violate international treaties to go into their airspace. We would start the war by doing that. Exactly. So the first thing, it's funny, it's kind of 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 actually returning usable photos of Soviet nuclear installations. So really, it becomes clear that what's required is an entirely new type of airplane that can either do one of two things, and ideally both. Fly over Russia stealthily and undetected by radar. Or two, fly high enough or fast enough that they can't shoot it down even if they do. And so Skunk Works, being the ambitious organization that they are, tries for option one, and we don't frankly know very much about what Russia's capabilities are.
So we're pretty sure that we can build some airplane that flies high enough that their radar systems won't detect us, and great. So let's do that. Yeah, great. So this is interesting. What government agency contracts them to do this? It's not the military. We're in the spy game now. It's not the army, not the navy, not the air force. It's the CIA. They are building their own air capabilities, and all of the work that Skunk Works does here and for many years to come is for the CIA.
Yep. So what exactly is the challenge that Skunk Works has laid out in front of them for designing this new spy plane? Well, at the time, the maximum altitude that airplanes flew was about 40,000 feet. The U.S. thought that the Soviets' best interceptor fighter aircraft could get to about 45,000 feet. Yep. And we also thought that their radar wouldn't function above like 55,000, right? We were like, all right, as long as we clear 65,000, we should be higher than their radar could even detect and certainly higher than their fighters could come get us.
Right. So the CIA's spec for Skunk Works for the U-2 is to fly at 70,000 feet. Now, there are a couple problems with that. One is that normal jet fuel doesn't work at that altitude. You know, at that altitude, the pressure, the temperature, everything about the environment, you're getting to be closer to space than you are to normal Earth atmosphere and things start going wrong. So that one, they actually subcontract with Shell Oil to make a new formulation of jet fuel that does work up there.
So, you know, that problem is solved. Problem number two is maybe a little bigger and that is that humans cannot survive at that altitude. So certainly you need a pressurized cabin, but if something were to happen and you needed to be out of the cabin, you know, cold, no air, blah, blah, blah. Yeah, and I don't know the technical details, but I think even the cabin pressurization technology that existed then was not going to cut it at 70,000 feet.
So you basically need a space suit. Exactly. Some of this technology came from like diving suits and some other things that came before this, but I think this was the big coming together of the technology that created the space suit and that's what they put these pilots in. Wow. So Lockheed and Skunk Works win the contract from the CIA. They start working on this plane sometime in 1953. Incredibly top secret. We wouldn't reveal the fact that this existed to the Russians, our own people, for years and years and years.
I mean, this is like the quote from earlier that we read from Ben Rich when he started working on this project day one and saw the prototype and then it hit him like a sack of cement, you know, how important this was. So Skunk Works completes and delivers the plane by July 1955. So like a year and a half and for a total project cost of three and a half million dollars. That's an M. That is not a B.
A year and a half and three and a half million dollars for one of the most important products and pieces of technology in American history. Astounding. This is what Skunk Works is capable of. So they're flying higher than any plane has ever flown before. They're using a different type of fuel. People are flying in spacesuits for the first time. Feels like, to be a reconnaissance aircraft, you would also need one other key component in order to achieve the mission of spying on the enemy.
Yeah. To take photos, you need a camera. Indeed. And you would need an all-new type of camera with all-new type of lens capable of taking photographs of something 70,000 feet away from you through, you know, a whole bunch of atmosphere. Gosh, if only the U.S. had someone who was just incredible at this sort of pioneering optics technology. Indeed, the U.S. did. And that was Dr. Edwin Land and the Polaroid Company who subcontracted and created all of that.
And actually, I believe it was Edwin Land himself that helped convince President Eisenhower to even pursue this project in the first place. He was like, we can build the camera that can do this. If we can get the airplane built, we can do this project. This blew my mind. It is so cool to see the intersections of different innovators throughout history. I mean, Edwin Land is the man who inspired Steve Jobs and he's building the U2's camera.
Oh, just wait. We are going to have a lot more tech in Silicon Valley and Apple stuff that's going to come up here in just a little bit. So they built the plane. You got to test this thing. They're not going to roll it on the runway in Burbank and take off and, you know, just head for the Soviet Union. You got to test it and, you know, it's got to be secret and whatnot. And remember, Kelly Johnson, one of his big principles is like, we test our products.
You, the government, don't test our products. We test our products. And we should be clear, this U2 spy plane looks crazy. It has a hundred foot wingspan. Yeah. This thing, if you saw it taking off, you would be like, okay, I've seen airplanes. That thing is completely different. So it's not like they could disguise it. Like, you need to figure out somewhere in the United States where there's basically nobody so that you can test this thing.
Oh, this is so fun. Oh, the smile on our faces is like, you can't see us, but it is stretching out of the room here. Yeah, you can't just paint this thing like a school bus and pretend it's something else. So they need to find a suitable test site. They go scouting all across the Western U.S. in kind of remote areas. Kelly Johnson is sort of like Sam Walton in his prop plane scouting out for, you know, Walmart locations flying sideways.
And then they get an idea. And that idea is, where is a place where even if there were people before, there sure aren't people now. Because nobody in their right mind would want to be anywhere close to where we just tested our nuclear bombs. And they go, oh, as long as we figure out that it's safe, that would be a perfect place for us to test this airplane. So they find a dry lake bed in Nevada called Groom Lake.
And there's a quote from Kelly Johnson here about this in the book. We flew over it and within 30 seconds, you knew that this was the place. It was right by a dry lake. Man alive, we looked at that lake and we all looked at each other. It was another Edwards, like Edwards Air Force Base. So we wheeled around, landed on that lake, taxied up to one end of it. It was a perfect natural landing field as smooth as a billiard table without anything being done to it.
How insane is it that this is where we were testing nukes? I actually do not understand how there was not radiation poisoning. And I don't fully understand the half-life and all that needs to be done. But like, how is that safe? Yeah, it's insane. And not only were there recently nuclear tests happening right nearby, I believe that nuclear testing continued right nearby while they're using this site, Groom Lake, to test the U-2. 100%. It's the craziest thing.
They had to like, sometimes take some time between the most recent nuclear test and when they wanted to go fly. Because these sites are like, I don't know, 12 miles away from each other or something pretty close. If you're curious, listeners, there's this great documentary on Amazon called Secrets in the Sky, the untold story of Skunk Works that has a bunch of footage of all of this. Wow. So listeners, if you haven't caught on already, the location that we are talking about, a Nevada test site in the middle of the desert, nuclear, some really strange looking flying aircraft, this is Area 51.
Skunk Works creates Area 51. And of course, there's rumors of UFOs there. They want to keep everyone away. For the people who they can't keep away, they're going to see some really weird flying stuff. So of course, the rumors are going to start. It's all goodness for Skunk Works. This cover is great. Oh, it's even better than that. I can't remember which plane or when this was, but at one point in time, one of the test flights crashed.
And, you know, 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 10 years before we would have the moon missions. Yeah. It's so funny. Amazing. Yeah. It's all Skunk Works in the U-2. Wow. And then the Blackbird and everything else we're going to get into later in the story, all happening out of Area 51.
The prep work that the pilots had to go through before getting on these planes too were nuts. They needed to breathe pure oxygen for two hours to remove all the nitrogen from their blood in case they had to eject. Because remember, these are test pilots on a super experimental aircraft. They were often ejecting or they were often, you know, things went wrong in these tests. Yeah. A bunch of people died doing this, like we should say.
Yeah. I mean, a great sacrifice to bring this program and subsequent Skunk Works programs into the world. But basically, what was happening is if you didn't breathe pure oxygen for two hours, you could get the bends, you know, for anyone who's scuba-dived and you can't fly right afterwards, from ejecting. And so, it's like, well, if you managed to get out of the aircraft before it crashed, then that could kill you. So, you needed to make sure that this sort of oxygenating of your blood and getting rid of all the nitrogen made it so that if you did need to eject, then you would survive this as well.
Yeah. Crazy. Okay. So, they test the U-2 at Area 51. So great. They get it up and running and in active service as an operational spy plane, pretty much the world's first, at least of this type, within a year, the first Soviet Union overflight happens on July 4th, 1956. Of course it was. Of course it was July 4th. Now, this is so interesting. There's a whole bunch of things that happen when they take out. Like, they don't know what's going to happen.
Is this thing going to work? Are the Soviets going to see us? Like, we're going to learn so much here. You can't script this stuff. The Soviets tracked it on radar, even at 70,000 feet. The whole way. The whole way. Right from it takes off, the whole flight path through Russia, they knew everything that we were doing. We were super wrong about their radar. They didn't just have low-altitude radar. They were capable of radar that could see straight up into space.
Wherever we were flying, they were going to see us. Yeah, which we had no idea. So we learned this as part of it. So here's what's funny. We know that they see it from takeoff. They track the U-2 the whole way. This whole top secret program, like, oh no, it's busted. They see it, but it turns out they can't hit it. So, you know, a whole bunch of fighter jets scramble, and the fighter jets, they can't get up that high, so they can't intercept it.
They launch surface-to-air missiles. The missiles can't hit anything that high up. So the U-2 just flies along. They're tracking it the whole way. There's planes flying along behind it, and they can't do anything. But at least we get the intel now in the U.S. that, okay, they can see up here, and so it's probably just a matter of time before they're capable of shooting something down up here, too. Yes, but here's what's so interesting. Remember, this whole war, like, God, it's fascinating.
It's a war, but it's not a war. It's a war of perception. So in that flight, we get incredible photographic observational evidence, and we would fly so many missions over Russia for the next few years getting this incredible intelligence. The Soviets never say anything because if they were to say anything and say that they tracked us into it, then they would be admitting that they were powerless to stop it. This war of perception, like, it's so crazy the incentives and motivations here, but it makes sense.
They're not going to say anything and reveal the program so it remains top secret because if they did, their sort of position and posturing of strength would be compromised. And neither country really wants to be at war, so we're both maintaining this, we're not at war, you know, and we're not going to tell you that we're preparing for if we need to be, but of course we're going to do whatever we can to understand the best about our enemy or not our enemy, other countries that we're not at war with.
Adversary. Right. And I actually think there may be, you know, military, historians that understand this better than us, but I think this was actually an optimal outcome for the U.S. Because, remember, just like you were saying, Ben, nobody actually wants to go to war here. The goal is for both sides to keep each other in check, and so this, the U-2 and these reconnaissance missions become a major chess piece for us on our side of the board to keep the Soviets in check.
We like this state, I think, that they know about it, but nobody talks about it. The other crazy thing is this camera is incredible. If you look up photos taken by the U-2 spy plane, it is remarkable what in the mid-50s this thing was capable of taking photographs of from 70,000 feet. The engineering all around that went into this is just incredible. I mean, you could do a whole podcast just about the technical aspects of the engineering advances.
And it basically works. They find a whole bunch of nuclear test sites. They find where missiles are kept. We basically have a real-time count of the Soviet Union's warheads, the Soviet Union's fighter jets, the capabilities that they have with their radar because it's painting our airplanes, so we now know that that exists. Mission accomplished in spades on this thing. We talked earlier about the cost of three and a half million dollars. I think you could make an analogy to the Louisiana Purchase in terms of 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 going to talk about in a minute. So, this all continues. We fly dozens, maybe hundreds, of U-2 missions over the next few years. The Russians are constantly trying to shoot them down. They fail. Nobody says anything. And then, on May 1st, 1960, ironically on May Day, we launched the U-2 program on July 4th. And it ends, at least over the Soviet Union, on May Day, 1960, the Soviets finally have developed a missile that can reach 70,000 feet with accuracy.
And they shoot down a U-2. This was the first time in history that a ground-to-air missile had shot down an airplane. I didn't realize this. I read that. I was like, oh, whoa. I guess maybe the technology didn't exist during World War II, the Korean War. And so this was a major historical moment in so many ways. America and the CIA and the government, the president, they're waiting. They're like, okay. Right. What do we do? America's posture is we were never there.
Right. But we know now that the motivation for Russia not to talk about it now is gone. Now they can position this as like, hey, we're so strong that we can keep people out. We expect them to say something right away. A couple weeks go by. They say nothing. Quite surprising. All we know is we've lost contact with our pilot and we didn't see them come back and land. So we presume that they shot down our pilot, but they're not saying anything.
But we don't really know. And we presume that if this plane was shot down, as we think, probably the pilot was killed. I mean, like, you shoot down a plane from 70,000 feet, probably the pilot was killed. Well... That's 14 miles in the air. Yeah. No. The pilot was not killed. The pilot's name was Francis Gary Powers. Pilot Powers. If you know anything about U.S. history, you probably know his name. And you probably know that he miraculously did survive and was captured and interrogated and probably tortured by the Russians.
And that this was the revealing of the U-2 program. So what happens? It turns out that there was a big summit in Paris scheduled for later in May between Eisenhower and Khrushchev. And Khrushchev announces on the eve of the summit that they have captured an American pilot, they have captured this new plane, that the U.S. has been illegally and in a provocatory manner flying over Soviet airspace, they have defended their country and shot it down, and this creates a huge mess.
Eisenhower first denies this and then admits it when we realize that like, oh shoot, this pilot is still alive, he's confessed, like, wow, this is a disaster. Yeah. So, 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-2 program, at least over Russia, is done. We don't fly any more U-2s over Russia. We can't. I mean, if we were to do it at this point, we know they can see us.
They now can talk about that they can see us and they can shoot us down. Like, it would escalate to war if we kept doing this. We have to stop. The U-2 becomes quite useful for other locations around the globe, but not over the USSR itself. This, though, is a huge, huge problem. This was the most important thing in the war and now it's gone, right? We now have no way to take photos of military sites in Russia because we can't fly planes over there anymore.
Right? We're blind. What do we do? What do we do? Well, the world would not know until 1995 when this would all become declassified under the Clinton administration, but that was only true for about three months thanks to another super secretive Lockheed division that figured out another way for us to take pictures of the Soviet Union. 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.
This is a completely separate story that takes place in a different place in California that is a detour from our Skunk Works story. And we'll be back because, my God, did Skunk Works do some incredible things after the U2. But before we do that, we want to take you to Northern California and the origins of Silicon Valley and Lockheed's participation in that. All right, listeners, now is a great time to tell you about a longtime friend of the show, Vanta.
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So you can get $1,000 off Vanta at vanta.com slash acquired. That's V-A-N-T-A dot com slash acquired for $1,000 off, and just tell them 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, but you sort of found the last 20 minutes and then just dug in like a splinter on this particular moment in history and how it is all tied in to Lockheed Martin.
So where are we going? Yeah, well, and it's even lesser known than that. Only certain versions of that talk that Steve has given contain the Lockheed story because so much of it has only recently been declassified, a lot of it even after he first started giving this talk. So what really turned me on to this was some of the chapters in Beyond the Horizons, even though that book was written in the late 90s. I started digging in and then I started watching some YouTube videos with some of the people involved in this and I was like, oh my god, there is this incredible story here that we don't realize.
Yes, in typical David Rosenthal fashion, you sent me a note the other day and said, you have to listen to this starting at 8 minutes and 50 seconds and I was like, what is this? And I click and it's a guy at a podium with a terrible recording setup from the IEEE Silicon Valley history video, so industry association. This thing has 124 views after being posted seven years ago. Incredible. This stuff is buried. I honestly can't believe it and I'm so glad that we get to tell it here.
All right, let's set the context. So if we rewind back to World War II, one thing we kind of mentioned here now as we were talking about the U-2 and the Russians tracking it on radar but we didn't talk about during World War II was the importance of radar. Now, so much of World War II was an air war, both in Europe and then especially in the Pacific. and the development of both radar and anti-radar technologies was paramount in the war efforts.
Yes, there was lots of land-based fighting and tanks and all that stuff but World War II 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-2 flights. Now, during World War II, where was all of the U.S. and allied radar work and research being done? It was primarily being done out of two institutions in Boston, MIT with the Radiation Laboratory or the Rad Lab and Harvard with the Harvard Radio Research Laboratory.
Now, here's what's interesting. Neither of these two labs at MIT and Harvard existed before the war. The government directed MIT and Harvard to set them up as part of the war effort. They didn't exist before and then MIT and Harvard, very fortunately for California and Silicon Valley, shut them down after the war. Now, it turns out that the head of the Harvard Lab was a professor named Frederick Terman. Might ring some bells for people, especially people who went to Stanford.
Terman was probably the world's leading expert on radio engineering and also vacuum tubes and early computing. Except Terman wasn't actually a Harvard professor. Terman was a Stanford professor. He was just on loan to Harvard during the war years because that's where the government set up the radio labs. And the government allocated millions and millions of dollars of funding to Harvard and MIT and something like $50,000 to Stanford. All of the funding for this was Harvard and MIT.
Yes, they assembled all of the world's experts and Terman was arguably one of, if not the leading world expert in radio engineering, assembled them there in Boston, I guess in Cambridge at Harvard and MIT. Cambridge residents would get mad at us if we say Boston. So after the war, Terman comes back to Stanford because Harvard shut down the lab. He comes back to Stanford and he does three things. First, he recruits away all of the best people that he worked with at the Harvard radio lab from universities all over the country.
He recruits them to Stanford. And he gives them tenure immediately. Yes. He's like, I want to make this deal as sweet as possible for you because I want to will Stanford into existence as an engineering institution. Yes, of the highest order. So that's one. Two, soon after he gets back to Stanford, he becomes the provost of the entire university. And as provost, he completely changes the way tech transfer is done at Stanford. No other university has as good of a tech transfer policy as Stanford.
They're notoriously friendly. Yes, notoriously friendly and everywhere else, including Harvard, MIT, Princeton, blah, blah, blah, are notoriously unfriendly and hard to work with. The classic story is Stanford owned 1% of Google at Spinout, which ended up making them an ungodly amount of money because of how big Google became. And if that were at other universities, they would have said 50% is what we need to keep or 33% is what we need to keep and they would have smothered the innovation before it could become commercially viable.
now. Now, I sort of in the back of my mind knew this because I had watched Steve Blank's talk many years ago, but I kind of forgotten. I just thought it was like, oh, well, that's because Stanford and Silicon Valley, like, we get it. We're smart. Not that we're smarter, but there's this attitude of, you know, if you're in Silicon Valley, even to this day, you're like, yeah, we get how the culture works here and 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 Terman and World War II and his experience at the radio lab. When he becomes provost, he's still a super devoted patriot. He knows how important this work is that it was during World War II and he knows it's just as if not more important during the Cold War. So what he does is he encourages students and professors to leave Stanford and go set up companies and work for defense firms and work for the military not to make money but to be in the nation's service.
Take the research and the people who are doing the research out. Start a brand new company. He would try to help you find funding which at that point venture capital didn't exist so he was introducing you to customers who could sort of pre-order from you to fund your research and he basically believed that a commercial ecosystem leads to more innovation than one that is purely happening in academia and thus could better serve the needs of the nation.
Customers. Customer. Customer. Hang on to that thought for one second. If you were doing all of this 10 years before the university would have looked at you and said what are you doing? You're encouraging this stuff to go away from us. It would have been career suicide in academia to do this. Instead at Stanford it becomes the best thing you can do for your career because in Turman's mind it's the best thing you can do for your country.
Okay so that was number two. Number three he carves off a big part of the Stanford campus. Now if you've ever been to the Stanford campus my god I was so lucky to spend two years there. It's like paved in gold. It's literally Shangri-La. They have so much land it's the most beautiful like idyllic place in the world. And like 80% of the land is still undeveloped. Yeah they own like all the way out to the ocean I think like it's crazy.
So he carves off a part of the Stanford campus and develops it to be leased out as commercial space to corporations and the government to come people to start companies companies to come to build to participate on this ecosystem all right there on campus. It's initially called the Stanford Industrial Park. Today it's called the Stanford Research Park. It still exists if you've ever been there. It's basically all of the office buildings up and down Page Mill Road in Palo Alto.
So it's HP and Hewlett-Packard. We'll talk about that in a minute. It's Tesla's landlord today. It's VMware. It's where Xerox Park was. It's where Next was and Steve Jobs. It's where Facebook's office was for a while. This is where Theranos was. Oh my god. So you might be like listening like well this is cool. Maybe I knew this stuff. Maybe I didn't. This is really fun Silicon Valley history. What does this have to do with Lockheed?
Well one of the very first tenants of Stanford Industrial ! Park. Ben you were talking about customers. customer who would go on to become the single largest employer in the area in proto-Silicon Valley by a huge margin was a new secret division of Lockheed. This blew my mind. This secret division is called the Lockheed Missile Systems Division later to be renamed the Lockheed Missiles and Space Company and what LMSC Lockheed Missiles and Space Company did. I honestly think like it is bigger impact to the country to the world and certainly on business to Lockheed and to Silicon Valley than Skunk Works.
This story is of a scale I don't know that we've ever really told on Acquired. There are a lot of Skunk Works devotees David. That is quite the assertion to say that this is a bigger deal. Well let's talk about it. Listeners you can judge. They patterned themselves after Skunk Works and took so many of the Skunk Works management principles up to Silicon Valley. I was reading Skunk Works and 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 1954 but it becomes so much more than that. Obviously this is also top secret stuff just like Skunk Works. So just like Skunk Works they set up the new Missiles Division in Burbank also in an unmarked building. They literally just copy paste Skunk Works right there in Burbank. And so it starts in Southern California. It does. But there's two problems with that.
First it's kind of unwieldy for a big company like Lockheed to have not one but two super secret unmarked divisions right there on the main campus you know 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 Missiles Division did start there because they took as I said a lot of Skunk Works management practices. The bigger problem is that it turns out that building missiles is a very different discipline than building airplanes because unlike airplanes you don't have a pilot in the missiles.
So you need missiles guidance systems. and that means that you need radar and you need computing. And those two things are not what Southern California is good at. But you know what's really good at those things? Fred Terman up at Stanford and everybody that he's recruited, literally the best minds in the world at all of that, who are now at Stanford and who are now being encouraged to go spin out and start companies who might just be subcontractors to a big missile system that you're trying to build.
Interesting. And this is cool. This is a part of the research that you did that I don't know much about. Yeah, this is great. So the next year in 1955, Lockheed moves the Missile Systems Division out of Burbank and up 101 to the Stanford Industrial Park. The very same Stanford Industrial Park that Fred Terman just carved out of the Stanford campus and developed on Page Mill Road. and Lockheed becomes one of the very first and biggest tenants of the Stanford now Research Park and is still there to this day.
Wow. Now, they can't actually do everything they want to do on the Stanford campus. You're not going to build a missile and test it on the Stanford campus. So Lockheed pretty quickly after they established themselves in Palo Alto, they also buy 275 acres just down the road in Sunnyvale and they build a huge campus there, 137 buildings. So when Lockheed buys this, the population of Sunnyvale is less than 10,000 people. What? Lockheed built Sunnyvale. I didn't realize that.
Wow. So how many people would eventually work in Sunnyvale at Lockheed? So by the end of the decade in 1959, just four years later, Lockheed Missile Systems employs almost 20,000 people in Palo Alto and Sunnyvale. And a few years later, by the mid-60s, they would employ 30,000 people. This makes Lockheed by far the largest employer in this brand new proto Silicon Valley. I mean, remember, I just said Lockheed built Sunnyvale. You think of Sunnyvale, Silicon Valley today, like Yahoo and Intel and all that.
Cisco. There was none of that. Lockheed built it. So Hewlett Packard was the largest tech company, computing company, Silicon Valley company at the time. Hewlett and Packard were students of Fred Terman and Fred encouraged them to spin out and start Hewlett Packard. They were the largest new tech company. They only had 3,000 people. One, two, three. Lockheed had 30,000 people. Whoa. Oh my God. It's a 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 Lockheed's campus and I got chased down by a security guard who's like,
well, you can't just run in here. And I had my headphones in. I thought I was in big trouble. Yeah, they had this huge structure called the Blue Cube that has since been disassembled. It's not there anymore. But you need a big hangar that you're going to build missiles it. And they end up building a lot more than missiles we're going to talk about. And you mentioned they need radio and they need computing. Computing basically wasn't a thing yet.
I mean, Shockley co-invented the transistor just a few years before, started Shockley Semiconductor in 1955. The same time as Lockheed is coming to Silicon Valley. Right. And of course, Shockley is a predecessor to Fairchild Semiconductor, which is a predecessor to Intel. So like, they've got Turman's radio background, but there really weren't any people with compute experience yet. That was all happening concurrently all around them in Sunnyvale and Palo Alto. So we talked about this a bunch actually on the first Sequoia Capital episode when we were telling Don Valentine's story.
And at the time when we were telling the story, we were like, oh, you know, Don, he was so legendary before he started Sequoia. He was the head of sales at Fairchild Semiconductor and the head of sales at National Semiconductor. And we sort of glossed over it. We were like, yeah, you know, he was mostly selling to defense companies. Well, who do you think he was selling to? I mean, he was selling to defense company. Yes.
Now, he was also selling around the country to other defense contractors too. Lockheed wasn't the only company that was working on missiles, but I think they were the only one that was working on missiles in Silicon Valley. Wow. And by God, did they buy a lot of product out of all these startups and all of these Silicon startups that are coming out of Stanford and coming out of Shockley and just getting sprung up right there in Silicon Valley.
I can't believe that there were 10 times more employees at Lockheed in Silicon Valley than at HP in the late 50s. Yes, it is totally insane. And so many people came through Lockheed into Silicon Valley, including one Jerry Wozniak, who moved himself and his young family out to this new Silicon Valley to become an engineer at Lockheed Missiles and Space Company. That's right. Woz's dad, the reason that Steve Wozniak grew up in Silicon Valley is directly because of Lockheed Martin.
Oh, that is awesome. No Lockheed, no Woz in Silicon Valley, no Apple. No Apple. Crazy. Not to mention, there's a really interesting point here, which is you wouldn't have this open commercial spirit to Silicon Valley without Terman and without the belief that the right thing for America was for all these companies to become companies instead of academic research or spread around in other parts of the country. It creates the Silicon Valley ethos and creates Silicon Valley as the place where that ethos would thrive.
And it's worth pointing out for people who don't spend a lot of time in the Bay Area, this has absolutely nothing to do with San Francisco. Nowadays, it's sort of this big blended soup of companies that have offices in both places and you can drive or take the Tical train between them. Yeah, that's a recent phenomenon. San Francisco is a completely different universe at this point that is in zero part responsible for the growth of Silicon Valley.
Yeah, and before this time, before the 50s, there was no Silicon. It was called the Valley of Heart's Delight. That was the name for it. It wasn't Silicon Valley. Huh. Wild. Okay, so what was Lockheed actually doing there? We talked about them working on intercontinental ballistic missiles, ICBMs, and missile defense systems. I think they probably did continue to work on that. But there were two projects that this new division of Lockheed took on that really changed history.
And both of them together became, for Lockheed at least, and the parent company, by far the biggest driver of profits for the coming decades. And really, as we'll see, this division, you know, not Skunk Works, this division kept Lockheed alive. Lockheed would have absolutely died without this division. So what were these projects? One went up to space, as perhaps is obvious and we've foreshadowed and literally is in the name of the company, the Lockheed Missiles and Space Corporation.
And the other one went down under the oceans. So let's talk about that one first, because I think it happened first chronologically. So submarines had obviously been a thing since World War II and even before that back to World War I. There's lots of advantages to submarines during wartime. They're stealthy, they can basically travel anywhere in the world, you can stay hidden for long periods of time, especially once nuclear submarines are developed that can stay underwater for months at a time, self-powered.
They're both a great offensive and a great defensive weapon during periods of active war. But during the Cold War, they're kind of useless. Because if you wanted to have a chess piece in position to strike a land-based target, if you could even do that at all with a submarine, you've got to get the submarine pretty dang close to the land, which means close to Russia, which means they know you're there and that's a provocation. Unless somebody could maybe somehow figure out a way to fire an intercontinental ballistic missile out of a submarine and go up into the air and into space and then hit a land-based target far, far away.
Now, this seems crazy. It's hard enough to make this happen from the ground. You're talking about doing this from the sea with all the waves and the lack of stability. No way this could happen. This thing has to thrust through air after it thrusts through water. Oh, well, you're making the leap already that you would fire it underwater. At first, when the Navy contracts Lockheed to work on this in 1955 to build the Navy's fleet ballistic missile system, it's FBM, the idea is they're going to fire these things from the surface of the ocean.
The submarine's going to rise up, they're going to, like, stabilize it in water and they're going to fire off a missile from the deck of a ship or a surface submarine. You could imagine another issue, which is these things have rockets on them, so you have to not destroy the launch pad, which is the submarine full of American humans, while launching it. Yeah, this is a big challenge. The reason that it was worth trying was that if you could create a naval-based intercontinental nuclear strike capability, it completely changes the strategic landscape of deterrence and first strike versus second strike and retaliation.
So, what we were really afraid of, we thought the Soviets would pursue a first strike policy if the they felt they were able to. The way that they would do that is if they felt that they could, in that first strike, knock out all of our nuclear capabilities. If they could target all of our land-based ICBMs, incapacitate them, then we would be incapable of responding with a second strike and then they could blow up our cities and whatnot.
Now, if all of a sudden you have a mobile naval-based missile system, well, that completely changes the chessboard. It's quite the deterrent. Quite the deterrent. You can now pretty much guarantee, as long as you can keep a fleet of nuclear submarines operating at all times, that you can't take them out and they can move around and be anywhere. And so, if you launch a strike, they're gonna launch right back. And first strike is now off the table.
This is a huge strategic win if you could put this actually operationally in practice. The other medium, if you will, location, that could change the dimension, too, for doing this would, of course, be space. If you had nuclear missiles up in space, that also changes the dimension. And this, among many, many reasons, is why when the Soviet Union launches Sputnik into space in October 1957, even though Sputnik itself was far from having nuclear ICBM capabilities, the Soviets getting to space first was truly terrifying.
I can't imagine how disconcerting it is in an era that, you know, now there are tens of thousands of satellites orbiting the Earth all the time. When that was a brand new thing, when you could look up at night, if you could see Sputnik, and you're like, oh my god, that thing, any day now, could have a nuke aimed at us. Right. Okay, so back to the sea. It turned out, like we were talking about a minute ago, that firing ICBMs from the deck of a surfaced ship, be it a submarine or otherwise.
Bad idea. Basically impossible. But firing missiles from under the ocean was doable. And Lockheed did it, with the help of Silicon Valley. So, in December 1955, the Navy awards this contract to Lockheed. The name of the project was Polaris. People might have heard of Polaris missiles. Just over four years later, after the contract is awarded in 1960, the very first U.S. nuclear ballistic missile-equipped submarine sets sail on its patrol, and everything we just talked about is operationalized.
Equipped with Lockheed, Polaris A-1, undersea-fired nuclear warheads, ballistic missiles, could reach land-based targets up to 1,200 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 II. Yeah. Lockheed did not make the submarines, nor did they make the nuclear warheads.
I think a lot of this work was done out of Sandia, which we talked about in the Amazon episode. Oh, yeah. Bezos' dad worked there, right? Grandfather, Bezos' grandfather, was the head of Sandia, which was in New Mexico, the military nuclear program, the division of the U.S. overall nuclear program, I think was out of Los Almos, but Sandia was the military arm of it. Which, weirdly, Lockheed, for many years, actually had a contract to manage Sandia, because there's some sort of strange partnership that happens where the federal government hires government contractors to manage national labs.
Yeah. To enable this strategic chess piece, the key thing is the missiles. Nuclear submarines already existed. Nuclear warheads already existed. The challenge here was create a system by which you could launch a missile from under the ocean out of a submarine. Man, I just gotta say, it is so fortunate and insane to me that neither side ever launched. All the deterrents for all the scary things that could have come out of it and all the itchy trigger fingers and everybody getting close, it never happened.
That is a big applause to humanity that we could have done this and no one did. Well, this is one of the things that I mentioned at the top of the episode. Doing this research sort of changed my mind on the war machine aspect of Lockheed and the military and the military industrial complex. But I think people really believed, and I think there's a good chance this was reality, it was building all of these systems and advancing all of this capability that prevented it from being used.
If we hadn't built this stuff, there's a good chance Russia would have done a first strike. Yeah, it's crazy. Okay, so Lockheed, after four years successfully, does the underwater ICBM launch. Yes. And then that quickly leads to more successor programs. and developing the technology further. The Polaris becomes the Poseidon is the next program, and then the Trident. The Trident missiles had a 5,000-mile range and carry a hugely destructive nuclear payload. Unbelievable. Terrifying. All right. So, we just told this incredible story about LMSC taking Silicon Valley under the ocean.
This program, you know, Polaris, Poseidon, Trident, for most people listening, especially if you're American, these names aren't surprising to you. You've heard of these programs. You are aware that the U.S. starting in the 1960s had nuclear submarines carrying intercontinental ballistic missiles. Yep. It was, if you think back to the kind of the chess game, it was in the government's best interest for the Soviets to know that we had these. The point was deterrence. In fact, we probably should have bragged about this even if it wasn't real.
Right. Maybe it wasn't. Who knows? We should have had inflatable subs floating around that we thought were nuclear. Maybe it's all the cover. Maybe all the money that went into Silicon Valley. Yeah. 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 II, but I think continuing after that in the Burbank facilities at Lockheed, I know Boeing in the Seattle area and other places to built basically these burlap cities on top of factories that looked like suburbs, complete with 3D cars
and trees and stuff so that anybody who was creating a spy plane and flying overhead would mistake our manufacturing facilities for something innocuous. Yeah, I think it was spy planes and also during World War II, bombers. If bombers ever made it to the West Coast, they wouldn't know where to bomb. I'm pretty sure that Disney Imagineering was involved in creating these sets like they made for Disneyland. It's crazy how sometimes it's in our best interest to make the adversary aware of our capabilities and sometimes we want disguised capabilities.
It's really interesting. Super interesting. Okay. So, if you remember back when we pressed pause on the skunk work story and moved up the state of California up the coast to Silicon Valley, we'd said that when Gary Powers and the U-2 was shot down in May 1960, that supposedly this was the end of U.S. observational capabilities in the Soviet Union and that it was for about three months, but nobody do it. Well, LMSC is the reason that we got our eyes back in the sky.
And you might know that eventually after the U-2, Skunk Works would create the next great spy plane, the SR-71, which we will get to. But that wasn't for a little while. So, this intelligence gap was filled by this secret, not very well-known project. I think a lot of people in the military who did know about this stuff, this is heretical to say because it's so beloved, but I think the Blackbird was a decoy. We were getting everything we needed from space.
We just didn't want anybody to know about it. And so, everybody 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. It kind of never needed to be because of LMSC in space. Whoa. All right. I'm listening. Okay. You got a lot of hairs on my arms. Yeah, yeah, yeah. I know. I'm getting mad over here. People are probably getting very mad. Here we go.
So, when you think about America in space and the U.S. space program, you think, of course, about NASA. Gemini and Apollo. Mercury, Kennedy, putting a man on the moon, all that amazing stuff, which for sure happened and was happening. All of that was basic science research. Nobody working on those programs, public observing it, like, it would be crazy to think there were going to be actual applications in space anytime soon. There's no infrastructure. Like, these are science missions.
This is research. And even, you know, Sputnik on the Russian side, Sputnik was a research festival. It was like the size of, I don't know, like a bowling ball or something. I think it was a little bigger, but like it was very, very simple. It was a long long time before you went from those initial science missions to applications in space. Or so everybody thought. Because in parallel, there was a secret U.S. space program being run by Lockheed Missiles in Space Corporation out of Silicon Valley.
And in basically the same 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 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. 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 spaceflight.
That was the cover story. They may have sent some monkeys up there, but that was not the point. The point was to get these reconnaissance satellites up to space. So the first program was called Corona. And you should Google about it and read there's a great declassification document story that the government put out in 1995 when they declassified this stuff. And the Wikipedia page is pretty good. Yeah, I downloaded it and I have it open my computer.
It's pretty crazy. It says secret. It has the classification on it and then it's struck through. Yeah. It's literally the document that was prepared in secret and then declassified. I think what the CIA and the National Reconnaissance Office does, I think they write these stories maybe quasi in real time so that there's documentation of all this stuff and then they stamp it secret and then it never gets out until it gets declassified. Wow. Just amazing. But on the declassification website, which we'll link to in sources, you can see a bunch of the pictures that the Corona satellite took, including of the Pentagon.
So you can see like something, you know what it looks like and you can see the level of fidelity that this 1959 satellite got of that. Oh, let's get into it. Okay. So the name Corona, there are conflicting stories of whether it comes from the Corona typewriter or the Corona type of cigar that apparently the Pentagon official that championed this program really liked. We'll never know. It's all classified. So these satellites, like we've been alluding to, had cameras on them.
The first one went up in August 1960. It was built in the years leading up to that by LMSC and then went up in August 1960. While everything else happening in space was, you know, research vessels, this first Corona satellite had a camera system on it that was able to photograph any ground location that it passed over in its orbit around the earth at a resolution as low as five feet from space. These were film systems.
Now the U2 camera system did have a higher resolution than that higher ground resolution, but five feet was still plenty good. And more importantly, the Corona system could take photos anywhere in the world on its orbit. And if you had multiple of these satellites up there, you know, you could pretty much blanket the earth or at least everywhere you cared about pretty quickly at basically any point in time. You know, they're spinning around the earth. Like, yes, you can't do it in real, real time, but like it doesn't take that long for the thing to fly around the earth and then fly around again.
Right. The very first Corona mission, that very first satellite that went up in August 1960, produced greater photo coverage of the Soviet Union than all of the previous U2 flights combined. Five years of operating the U2 program, one satellite in one kind of month long mission, I think it was about a month before it decayed, the orbit decayed, got more than all of that. Wow. No need to fly a plane, no need to worry about getting caught, no need to worry about the Soviets knowing what was going on, no need to worry about being shot down.
Unbelievable. There's a crazy stat. Over 800,000 images would be taken by these satellites over the course of the program. They got an enormous amount of coverage. Now, you might be thinking as you're listening, you know, oh, I know how satellites and satellite imagery works today. You know, you got Google Maps, you got Starlink, you know, blah, blah, blah. Starlink's communication, but like communication. Yeah. How did they beam these images down from the ground? These were not digital photography.
This was film freaking photograph. So you got to get the film down from space is my point. Which they literally did. And how did they do it? They dropped it. Okay. So that's the craziest thing. They dropped from space a canister with film in it. Mind you, they can't mess up and expose the film and ruin it. This is very delicate film. They drop it in a canister from orbit. It enters the atmosphere and during all the heat and everything.
It's not like you just shove it out of the satellite. They had retro rockets built into the film canisters to reaccelerate out of the orbit and move it down to go into the atmosphere. Right. Because if you just drop it out behind you, then it stays in orbit. It needs to decelerate its rotational velocity so that it does move closer to the earth. It is in a custom designed canister called the film bucket that General Electric designed.
It would separate and start falling to the earth. After the incredible heat and violent action of moving through the atmosphere, the heat shield that surrounds the vehicle is jettisoned at around 60,000 feet. So again, where the highest airplanes can start to fly. And parachutes would be deployed. So you've got this film canister. This is my favorite part. This is so good. Coming down with a parachute. The capsule is designed to be caught in midair by a passing airplane towing a claw.
The claw grabs the parachute and they use a winch to bring the film capsule into the airplane. It's like those claw games in the arcades, you know, like, oh, you pick up a... Literally, they had a freaking C-130 flying around with a big-ass claw to snatch this thing out of the sky. Unbelievable. You might say, what if the C-130, which by the way, Lockheed airplane that still flies today, the C-130J, what if the airplane misses it?
Seems like that's a pretty reasonable probability when this thing's falling from space and you're trying to catch it with a moving object. It can land at sea. And there's sort of a self-destruct mechanism where there's a salt plug in the base that dissolves after exactly two days, which if that happens, then the film sinks forever to the bottom of the sea. So if the Navy can't retrieve it within 48 hours, the salt sort of dissolves enough.
Because obviously, what would the biggest disaster be would be if somebody else or the Russians got their hands on this and were like, holy crap, somebody's taking photos from space of us. Right? The whole thing is genius, crazy, and absolutely insane that it actually worked. I believe it wasn't just one C-130. I think they had a whole fleet of C-130s all flying around where they thought this thing was going to reenter the atmosphere. You need to.
Because how else are you—I mean, when you have a satellite orbiting the Earth that fast at, I don't know what it is, Mach 20-something, it's pretty hard to predict exactly where your tiny film canister is going to come back and land. And all this happened in 1960. Oh my god! So, all told, the Corona Satellite Program and LMSC also designed the Agena rocket, which was the kind of upper stage rocket booster that the Corona Satellite and other satellites, future satellites, attached to.
And I think they sort of pioneered the concept of a second stage. Like, we need a first stage to get us up, and then we need a second stage to get us to a very particular orbit that we care a lot about being in. So, that system of the Corona and the Agena was the first spacecraft in history to do all of the following things. Achieve a circular orbit. Achieve a polar orbit. Be stabilized on all three axes in orbit.
Because you kind of needed to be stabilized if you're going to take photos at five-foot resolution of the ground. 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 39,000 man-made objects from space. They took 2.1 million feet of film of photographs in 39,000 cans. I mean, any one of those things that I just mentioned, if this weren't a top-secret black classified program for, what, three and a half decades, we would be all over the history books, and as is, like, nobody knows about this stuff.
Yeah. It's the first, obviously, mapping of Earth from space. It's this first stereo optical data from space. It's the first reconnaissance program to fly 100 missions at all, let alone one in space. I mean, this thing operated for 12 years. Yeah, crazy. So, corona would then lead to three follow-up programs that we know of. I'm sure many, many more. But there are three follow-on ones that LMSC did that have been declassified so far. Some of these only very recently.
So, the strategy of the program evolution over time followed the four stages that we know of. First, it was what they called see it. That was corona. Just period, can we see the Soviet Union from space? Corona proved that. The next phase was, can we see it well? And then the phase after that was, can we see it all? And then the last phase, which is a lot of the last phases still classified, is see it now.
So, let's talk about all of these. Corona, like we said, was just see it, get photos. But the photos were at a worse resolution than what the U2 was able to achieve. In 1963, only three years after the first corona satellite goes up, LMSC and the government launch the Gambit program. This is the see it well. So, Gambit's max resolution still has not been declassified. We don't know how sharp it was. This thing launched in 1963, and it is still classified how good it was.
But it has been confirmed that the resolution was under two feet, which was better than the U2 cameras. Whoa. Less than two feet from space in 1963. Next was Hexagon. Hexagon was the, quote, see it all program. Now, this is starting to eclipse a little bit my technical knowledge, and I think there's also just less known about this because a lot of this is still classified too. I believe the Hexagon satellites had longer orbit lifespans and had more film capacity before they decayed.
And so, I think they were able to kind of like see more longer, I think is what Hexagon was. You basically would need larger format film with a wider angle lens if you don't want to increase your number of satellites. Yeah. I'm fuzziest on Hexagon. Then, in 1977, they launched Kennen, K-E-N-N-E-N, which this is still like very classified. Some of it is out, so we can know a little bit about this. There actually was an incident in, I think it was 2019, when Trump was president.
He tweeted an intelligence photo. That was just like this incredible photo of, you know, incredible resolution of something had happened somewhere, maybe in Iran. And he tweeted like, oh, see, like it isn't what you thought it was. And people went nuts. People believe it's never been confirmed that this photo was from a future version of the Kennen program. Huh. Yeah. So what was Kennen? Kennen, it was See It Now. It's the first real-time space-based surveillance system.
I guess maybe the first real-time surveillance system period. I don't know. By 1977, there were enough communication satellites up in the sky. And digital photography had come along far enough. The Kennen satellites are like what we think about like Google Maps. Like it's real-time digital photography beamed down via a ground link to stations in real time. Whoa. And Lockheed has to build their own digital workstations to like process these photos, to display them, to manipulate them.
Like I think these might have been the first or like really early digital photo processing manipulation workstations that were sold to the CIA. I didn't know about any of this. Yeah. Lockheed built all this in Silicon Valley. Wow. By the way, you keep saying Google Maps. There's a fun piece of trivia that I'm curious if you know. Do you know, I think it was the code name, the original name for the Corona program. Oh, Keyhole. Yes.
Yes. Which is one of the companies that Google acquired that became Google Maps. Yep. Different Keyhole. Different Keyhole. But I'm pretty sure Keyhole Inc., which became Google Maps, was named after this Keyhole program. Ooh. It very well could have been because it was 1995 when that was declassified. And I'm sure Keyhole was started after that. Yep. Just super cool. Along the way, LMSC also does a lot of pioneering work in weather satellites and they launch weather satellites because it turns out that most of Russia is under cloud cover most of the time.
So they got to know when, you know, the weather is going to be clear enough to look pretty awesome. Well, that's when you get into like all the synthetic aperture radar and all the other types of sensing that you have in satellites now that are not just the visible light spectrum in order to get visibility of stuff on the ground. No rad are the conditions. Yep. They're part of the positioning satellites that the military puts up and that goes on to be opened up to commercial use.
And that's the GPS system that we use today. And of course, I'm sure LMSC is part of many, many other things in space that we still have no idea about. Wow. Yeah. One thing that we have a lot of idea about that they built that I had no idea until researching all this. So, you know, we're now in the 70s as this is going along and we'll come back and talk a little bit about this as we come back to Skunk Works here in a sec.
But we're getting towards the end of the Cold War and this stuff is less urgent. Lockheed and LMSC start moving into non-military applications or trying to. But LMSC gets a contract from NASA and builds the Hubble telescope. Did you know that? I did know that. And Martin Marietta, future Martin and Lockheed Martin, built the large orange fuel tank for the space shuttle, which took the Hubble telescope to space. Haha, that's so awesome. Different companies at the time.
Now the same company. Yep. All right, listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team and deploying them is no longer the hard part. Yeah. The hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making. AI security for an enterprise at scale is not a small concern.
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And in a future that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company. But the question is, who's managing them all? So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely, at scale, go check out ServiceNow.com slash acquired and tell them that Ben and David sent you. Okay, two other things that I want to talk about with LMSC before we come back to the coda on Skunk Works and the Blackbird and all that.
One, I think I alluded to this earlier. LMSC, listeners, you be the judge. The stories that we've just told, is this more impactful to America and the world than what Skunk Works was doing? Personally, I kind of think yes, but maybe you can debate. What is undebatable is that LMSC, from a business standpoint within Lockheed, became the crown jewel of the company. Huh. Which isn't true anymore. Or at least it's not their largest business today. Well, I think at times in the 60s and 70s and 80s, LMSC was the largest business by revenue.
But almost through the whole time, it was by far the most profitable division within Lockheed. And at times, when we'll get into, Lockheed fell on some really hard times in the 70s. There were years where LMSC generated more than 100% of the profits of Lockheed. No way. So all of the rest of Lockheed, Skunk Works included, was in the red, unprofitable, bleeding money. And LMSC was keeping the company afloat. Wow. And if you think about it, I guess one, just what they're developing and the scale of it and these contracts are huge, both 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 and computing problems that LMSC is tackling here. Yes, they're building missiles. Yes, they're building rockets and all that. But the core value components of those rockets is computing and silicon and ultimately software. And as we talk about all the time on this show, like, well, that's really good margins.
Definitely better margins than building airplanes. Hmm. So the stats I have, this is from beyond the horizons, which also is where a lot of the story, especially of Corona, came from. During the 12-year period from 1960, when Corona first launched, to 1972, Lockheed as a whole did $26 billion in revenue over that 12-year period and just $255 million in total profit. Not a high margin company during that period. LMSC accounted for over a third of that revenue and 128% of the profit.
So that's what I was talking about. Everything else in Lockheed lost money, or at least in aggregate lost money. And then during the early post-Cold War period from 1983 to 1992, LMSC accounted for 46% of revenue, so growing percentage of revenue, and 72% of profits during that 10-year period. Wow. It really is a completely different company today. And I want to save why as we drift toward today in analysis and all that, but that's crazy how big the LMSC business was at the time.
It was a great business, just from a business standpoint. So the other thing I want to talk about before we come back to Skunk Works is LMSC's operating principles and philosophy. And so much of that was built off the shoulders of Skunk Works, and a lot of the guys in the YouTube videos that I found talk about this. Their philosophy, though, they codified into seven tenets. So Kelly had his 14 rules, LMSC had seven tenets. And most of them are very similar to the Skunk Works rules.
We'll link to an image of them in the show notes. One of them, though, that I want to highlight and discuss that to me stands out as different from Skunk Works is tenet number one. And that one is focus on a threat-based need. And I think that's really interesting. Huh. To me, when I read that and thought about it, that element is missing from Skunk Works and Kelly's philosophy. 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 tenet number one for the company, I think you could maybe extrapolate that a little bit to the market context is really important for what you're doing. And don't lose sight of the market context for what you're building. Kelly's philosophy of all that matters is rapid delivery of superior products. Nowhere in that statement is there room for the market. Well, who decides what's superior?
Maybe a small number of people want this, but do a large number of people want this? Like, how important is this? Obviously, what Skunk Works was doing was really important. Or so they thought. I mean, if they knew about this robust spy satellite system. Well, this is the argument. Maybe it wasn't that important. Maybe the Blackbird was a decoy. Okay. We have not talked about the SR-71. Can you please take us back to Skunk Works? I'm, like, dying for my Mach 3 airplanes and ribbon engines here.
Uh, okay. Let's do it. But keep that in mind, though. A threat-based need. Was there a threat-based need for the SR-71? Maybe. My computer wallpaper needs to exist, so that's a need. Oh, there was a market need. Was there a threat-based need? Okay. So, Skunk Works. The greatest airplane ever built. Gee, it sure would be nice if we had a plane that couldn't be shot down. So, when Gary Powers is shot down in May 1960, of course, as you would expect, the CIA and Skunk Works is already hard at work at the successor airplane to the U-2.
Everybody believes it's kind of a miracle that they were able to fly for five years like they did. They knew that this day was coming when the Russians would be able to shoot it down. So, as we talked about, the U-2's primary defense, as it so happened, wasn't intentional, but as it happened in practice, was how high it flew. It was obviously trackable on radar. 70,000 feet. Yep. It's not like you could evade enemy fighters or missiles in this thing.
It had a 100-foot wingspan. It turned like a school bus. It was how high it flew. And then all of a sudden, that was no longer defensible. So, it's not very fast, and it doesn't fly high enough to evade missiles. So, kind of useless? Yep. So, if you remember back to the original spec for the program, there were three sort of vectors that were possible for how you could operate a program like this. One was fly high enough.
That's what the U-2 ultimately did. There was also, though, fly so that it can't be seen by radar. Stealthy. We'll come back to that in a few minutes here. And then three. Make it go so fast that even if they do fire at you, it just falls behind and then explodes miles behind your incredibly fast airplane. Yep. So, that's the path they took. If you can't evade them, outrun them. Yep. It's like the Sonic the Hedgehog of airplanes.
So, this program, if you know anything about the SR-71 Blackbird, you're like, well, that's an Air Force airplane. We're talking about the CIA here. The Blackbird was not a CIA airplane. The program that the Blackbird ultimately came out of was the A-12 Oxcart. This was essentially the same airplane. We'll talk about the differences in a minute. But this was the CIA contract that they had Skunk Works working on. And it was, yeah, the goal of make this thing so fast that whether they see it or not, they're not going to shoot it out of the sky.
It has an even better camera, I think also designed by Edwin Land, and it can get these incredible photos flying really, really fast. Yep. And to be able to avoid surface-to-air missiles, that basically meant that the specs for this thing were that it had to go Mach 3 or faster. Now, to outrun any, you know, missiles. It had to do that with a pilot. There had to be humans in this thing. Faster than Mach 3 is faster than 2,000 miles an hour.
If you fire a rifle, that bullet doesn't go Mach 3. If you're standing on the ground and you pick up a rifle and you shoot it and an SR-71 flies over your head, the SR-71 will beat the bullet. Yeah, it goes about two-thirds of a mile every second. This thing also is not very good at turning, as you would imagine. So there's a fun stat about the SR-71. It cannot turn around in the state of Ohio.
Its turn radius to change direction by 180 degrees is a wider turn than the state of Ohio. Oh, wow. Its decommissioning mission, just to show off how fast it ever went, was one hour and five minutes from L.A. to D.C. For being placed in the National Air and Space Museum? Yep. Coast to coast in an hour. Wow. Wow. And I remember being a kid and looking at this thing like, well, why didn't we commercial this? Like, you can't commercialize this thing.
You've got to be in a spacesuit to fly this. Totally. It flies at 84,000 feet. Up looks black to you. Straight basically looks black to you. You can see the curvature of the Earth. You can't navigate really by Earth-based landmarks because the Earth-based landmarks are moving by you too fast. So the best you can do is be like, the Rockies are in front of me. Oh, the Rockies are behind me. And that's not terribly useful. So they had to invent a new navigational guidance system that sits on the top of the plane, R2-D2 style, looking like an astromech from Star Wars, to navigate by the stars.
That's so great. I mean, it is like 50 concurrent miracles that went into making this thing possible. And hopefully this is obvious. But just to make the point again, you know, some of you might be sitting there being like, well, you just told me about how the sister company, LMSC, did all this amazing stuff in space. You go a lot faster than that to get to space and whatnot. And like, yeah, but you don't have humans on there.
So a pilot's got to fly this thing. And these aren't rocket engines. These are jet engines that they figured out how to make go Mach 3. Yep. Okay. So when Skunk Works and Kelly and Ben Rich and everybody sit down to work on this, the current state-of-the-art fastest plane at the time, this is late 1950s when they start working on this, is the McDonnell Douglas F-4 Phantom. Which is able to hit just over Mach 2 with its afterburners on.
So not sustained flight. Like when you punch the afterburners, it can barely touch Mach 2. And the F-4 itself was only a bit faster than the Skunk Works built F-104 Starfighter that Ben, you mentioned earlier, which was the first Collier Trophy that Kelly Johnson won. So the idea that you were going to achieve cruising speeds, like sustained speeds above Mach 3, this is a big piece to bite off here. Only a handful of planes have ever been able to do this since.
And I'm pretty sure no other plane has been able to do this at cruise speed without engaging afterburners. It is still to this day, unless there are classified programs we don't know about, the highest and fastest humans have ever flown without rocket propulsion. Yes. Okay, so how are you going to do this? The only way you can do this in a jet-powered plane is to essentially design something that can run with afterburners on all the time.
Like they're not afterburners, they're just burners. It's how the thing goes. To do that, you A, required a tremendous amount of fuel, and B, you also produced heat in doing so that's like rocket-level proportions. The skin of the airplane gets to 500 degrees Fahrenheit. The area near the engines on the airframe itself gets almost to 1,000. Yes. And the engines, I think, inside the engines get to close to 3,000 degrees, I believe. So they had to build the whole plane out of titanium to make this work.
Which was a metal that no one had ever built a plane out of before. Right. This is really funny. There wasn't enough titanium in the United States to build all these blackbirds, or raw titanium that they could easily source. There happened to be mines somewhere else with a bunch of titanium. So the government and Lockheed set up a bunch of dummy corporations. In Europe. Like European-incorporated dummy corporations. Yes. And they source a large amount of the titanium that goes into the blackbirds, the A-12s and then the blackbirds, out of the Soviet Union.
Oh, too funny. And by the way, you can't machine titanium with regular tools. Right. Titanium is so hard that it will damage your tools. So they had to machine new tools for the blackbird itself out of titanium in order to manufacture the titanium plane. I feel like it's like a diamond cutting facility or something. Totally. And I think traditional materials, like aluminum, would lose its strength around 300 degrees. So like you actually need a different material.
Otherwise, the whole plane would just dissolve when it got that fast. Amazing. So there's another funny thing here, which is metal expands when it gets hot. And normally your airplane materials don't get that hot because you're not going that fast. So it's fine if the metal expands a little bit. Except when it's getting this hot, the panels, the skin of the airplane is going to expand quite a bit. So that means if they expand a lot, you have to leave a lot of room.
So how do you leave room? So what they want it to do is fit together really snug while the plane is flying, which means the panels have to fit together kind of loose when the plane's not flying. Ben, are you telling me that the blackbird had panel gaps? The blackbird had panel gaps. And to add insult to injury, there are a variety of reasons they decided not to have custom fuel tanks. They literally just made the skin of the aircraft the fuel tank itself.
So you didn't need sort of multiple. You needed it to be light. And you needed a lot of fuel in there. Right. And so when it was on the ground after you fuel it up, because there's gaps in the fuel tank, it would just leak fuel while it was sitting on the ground. So to solve this problem, they went to Shell and had a custom fuel created for it that was not flammable on the ground. Like you could smoke a cigarette next to it and it wouldn't burst into flames because after you fuel this thing before it took off, it's just going to leak fuel all over the tarmac.
Oh my God. This is one of the reasons why, um, it is maybe spoiling it a little bit, but to flash forward, the Air Force hated operating these things. Yeah. I mean, it costs, I think, $300 million a year just to maintain these things. These were beasts from hell in every sense of that phrase. The good and the bad. Yep. Okay. So that's some of the materials challenges. Another problem was on the engines. So the most advanced jet engines in the world at the time was the Pratt & Whitney J-58.
And I believe actually they weren't even able to get the J-58 in the first A-12s and then only later in the Blackbirds did they put it in. And we should tell people the Blackbird, the SR-71, was the two-seater Air Force version of the single-seater A-12 CIA airplane. Yep. Yep. So even the J-58s couldn't produce nearly enough thrust on their own to get to and sustain the Mach 3 plus speeds that they needed to hit spec. In fact, at least according to Ben Rich in Skunk Works, they could only produce about 25% of the thrust required.
So Ben leads a team that engineers the spike inlet system. So if you're looking at a Blackbird and you look at the engines, they've got these like cones in front, these spikes, these big spikes. I mean, I'm sure everybody listening has seen a photo of a Blackbird. If you live in Seattle, go to the Museum of Flight. There's a handful of these at various museums around the country. You owe it to yourself if you have not seen one of these things in person.
It's just one of the most amazing objects ever created, ever. But these cones, what do they do? So the engines get the thing up and then once it's up in the air, the cones expand and retract. First suck in and then compress and then superheat massive amounts of air that they then mix with fuel in the engines and ignite. Essentially, this is the world's most badass supercharger ever created. These things are superchargers. That's what they are.
The spike system is a supercharger for the engines. It provides three quarters of the thrust needed to get to Mach 3 plus and sustain it. Unbelievable. Obviously, Dave and I are fanboying this thing. It's really easy to feel good about this airplane because it also never carried guns. It only carried cameras. You couldn't shoot bullets out of it because it's faster than the bullets. Right. But they did consider, I think Kelly and the Skunk Works team were really advocating to build a tactical aircraft that was based on this or a bomber.
And that never happened. So every version of the SR-71 or the early prototypes of the Archangel or the CIA spy plane, they're only ever badass airplanes that carry cameras. And go really fast. Yeah. Yeah. So, fortunately, you know, Skunk Works and the CIA had started working on the A-12 ox cart before Gary Powers was shut down. It takes, I believe, quite a while to engineer this beast. They start test flying it in April 1962. Of course, at Area 51.
Where else are they going to do this? Once they start test flying it, that's when the Air Force finally gets interested in the project and is like, oh, we want our version of this. And that's how the Blackbird comes about. Fun little bit of trivia. Within the Air Force and the Pentagon, the project originally was called the RS-71. Yes. Not the SR. And the SR-71 is strategic reconnaissance, but it ended up being backwards. Yeah. So funny.
It happened because President Lyndon Johnson actually announced the existence of this thing in a national speech. And during the speech, he calls it the SR-71 instead of the RS. There's some speculation that it wasn't that he messed up and made a mistake, but that his speechwriter wanted it to be called the SR-71 and intentionally modified the speech. Who knows what is relevant? Though, post-Cold War politics become a huge thing here. So once Johnson says this, nobody is willing to contradict the president.
So Skunk Works has to go and, like, redo all of their documentation for the whole damn thing. You can imagine Kelly Johnson's reaction to this. So the first official flight of the Blackbird happens on December 22, 1964. It reaches a top speed of Mach 3.4. God. The airplane wins Kelly his second Collier trophy. I mean, still, to this day, people lose their minds over this thing. I mean, it's stunning. It, I believe, has never been shot down.
There were some accidents in test piloting. But yeah, it's never been hit by an enemy. I think it took four years to ever even be detected by radar for the first time, all the way until 1968. It has played roles in surveillance in Vietnam, Korea, Arab-Israel conflict in the 70s. Obviously, the USSR. There's stuff you can find out there on the internet. Obviously, nobody really knows. But supposedly, according to internet lore, over 4,000 missiles have been shot at Blackbirds and none of them have ever hit.
But it is just such an awesome, badass thing to say the way that we're going to get around getting shot down is just to be faster than the missiles and be right about that. It's especially awesome when you know, as, you know, the highest levels of the government, it's kind of all a decoy anyway. You're getting what you need from other sources. Man. So this is a good time to talk about that. You keep saying that.
I had no idea until you brought that up, what, an hour ago. I think you're right. Yeah. Well, here's one area where I'm wrong. I do think that statement is mostly right. But you could argue with it, and people do and did, in that satellites are not real time. You know when they're coming. You know when they're about to fly over. If you need to instantly get somewhere that maybe you don't have the right orbit coverage for or where there's a dynamic situation, if an enemy knows that a satellite is flying over it and doing reconnaissance, they know when the satellite is going to fly over so they could hide stuff during those times.
If you need full flexibility, you need a Blackbird. So it does have a use. It's not like it's useless. But unlike the U-2, which was everything, it's more of a niche use case here. So the Blackbird doesn't fly today. Civilians are unaware of something that has flown faster. There's a crazy stat, a little piece of trivia about the SR-71. And this really puts into context how early this was and how strange it is that we've had nothing faster since.
The SR-71 first flight was closer to the Wright brothers than today. Yeah. Wild, right? It's totally wild. And I mean, this whole thing was built with slide rules. I had a very controversial tweet get a community noted where I said that it was before the invention of the desktop calculator. It's like mostly true. There's technicalities to it. But, you know, Kelly and team basically 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. Yeah. Now, I don't know the details of stealth with the Blackbird. I imagine a big part of that was the height was the altitude and the speed of it. It's not that, I don't think.
It's more around the shape because radar will just go unimpeded, you know, out into space. Yes. There's famous stories about detecting where people's radar transmitters are by bouncing them off the moon and figuring out the patterns of bouncing off the moon. It's more, I think, that the SR-71's bottom was one of the first airplanes with a flat bottom rather than a rounded fuselage. And so imagine I'm shooting a set of waves at a round sphere in front of me.
Well, some of those waves are going to bounce back because some of that sphere is exactly perpendicular to me broadcasting it. There's one particular point that's exactly perpendicular. And I can kind of tell the radius of the thing by how I'm detecting waves that are bouncing back at me. But if it's all flat, there's only one very specific angle for which I can shoot waves at it where I'm perfectly perpendicular. And every other angle that I shoot radar at it, it's going to bounce off and not come back to me as a transmitter.
You'd need transmitters coding all over the earth to figure out where all those waves are bouncing. And so by making the bottom flat, they made it so that if it was truly flat, then there's only one exact moment in time that a given radar transmitter is useful. Ah, 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 or receiver.
Super cool. So keep in mind for a minute from now that idea of flat surfaces and planes and radar. Planes, not airplanes. Planes like a flat plane and surfaces. Okay. To close out on this amazing airplane. Amazing and sad in a lot of ways. It's hugely expensive to build these things. $33 million per plane, which was a lot back then. I mean, planes now cost more, but a lot. And then, as I said, $300 million a year just to keep them operational and run the program.
You couldn't use it as a fighter or a bomber. It was only reconnaissance. It's not super popular with the military and the Air Force. They kind of don't like it as an operational plane. Right. It's a lusty airplane. Yes. It's not a daily driver. Let's put it that way. In 1970, the Pentagon cancels further orders and they order Skunk Works to destroy all of the titanium tooling 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 going to be prohibitively expensive for you or for anyone to ever think about starting the program back up. Yep. The existing ones do stay in service, but obviously this is like a big blow to Skunk Works revenue.
They're not producing these things anymore. On the back of that, Skunk Works has to do layoffs, the Skunk Works division, after the contract is canceled. In 1972, two years later, Lockheed and Skunk Works lose the bidding for the F-16 fighter. General Dynamics wins that. But 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-16s today. So here's what's interesting about this contract and Lockheed and Skunk Works losing it. And this is an example, I think, to that first tenant from LMSC of threat-based need and real, you know, need, market need. Maybe you want to adapt that to. Kelly Johnson, as amazing and a genius as he is, is a very stubborn man. And the stated purpose, the Air Force's goals with the F-16 was to have a cheap fighter.
It didn't need the best. It needed to be cheap and that they could make a lot of these and they could use them all over the world. That's not Kelly's MO. And so he and Skunk Works bidding on this project, they kept trying to give the Air Force what they didn't want. And they lost it. Like the idea of Skunk Works losing a contract, this is crazy. And in particular, he didn't really want to play ball the way the government was trying to bid out the contract.
He looked at the requirements. He said, this is stupid. I'm going to design you an airplane that I think meets the needs of how this will be used in the field rather than what these technical specifications say here. And over the long run, he was right. As the program evolved, the specs actually changed to what Kelly decided to build their prototype airplane to do. But the prototype they produced was not in spec for the original F-16 requirements.
And by this point in time, to bring some context back of where the country was, you know, we're now basically post-Vietnam War. The Cold War is for sure still going on. But it's not the same level of urgency in Americans' minds as it was back in the 50s. Not to mention, all military muscle is very unpopular in America. And so any politicians who are seeking to sort of expand the might and budget and proactivity of the military are facing a lot of resistance at home.
And that is probably a good thing for our society that that was happening. And at the same time, it made Kelly kind of a relic. Yeah, totally. And this is not a challenge that LMSC, at least with the Corona project, had to face because nobody knew about it. Right. So this is a really bad time for Lockheed. This is the period, like we were talking about at the end of the LMSC chapter, where it's LMSC that keeps the company afloat.
Kelly retires. Kelly retires. Ben Rich takes over as head of Skunk Works. Skunk Works is doing layoffs. Because Lockheed really stupidly decides to try to get back into the commercial aviation business. L-1011. They make the L-1011, which by all accounts was a great airplane, but turns into a disaster project. They're trying to compete with Boeing and with McDonnell Douglas here. The DC-10, I think, was the McDonnell Douglas competitor. Lockheed partners with Rolls-Royce to make the engines.
Right as Rolls-Royce goes bankrupt and gets nationalized by the UK government. All told, we won't go into the whole history here, but the L-1011 airliner project loses Lockheed $2.5 billion. And as we said a few minutes ago, this is not a super profitable company. They don't have $2.5 billion in other earnings just sitting around to soak up the losses here. At the same time, Lockheed also gets caught up in really nasty bribery scandals around the world.
But these are nasty political scandals themselves. And basically, Lockheed comes out looking, at least to the American public, like kind of a corrupt arms dealer. So, what happens is, you know, Lockheed and lots of people would argue that this is just the way you needed to do business in foreign countries, our allies that Lockheed sold these weapons to. In the Netherlands, in Japan, and in Saudi Arabia, it comes to light that Lockheed employees and contractors are paying bribes to political officials to win contracts.
This actually brings down the Japanese prime minister at the time. This is a huge scandal in Japan on the order of like Watergate in the U.S. 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, on the military side, kind of the main Lockheed divisions, engage with a couple helicopter projects with the military. And then the C-5 Galaxy transport plane. Those projects go horribly.
They have huge cost overruns. The C-5, at least, I think, does ultimately become a good airplane, but costs way more than the initial bidding. All of this conspires that, especially post-Vietnam period, the American public starts to view Lockheed as this corrupt vampire octopus military industrial complex squid sucking on America. Things get real bad. But Lockheed's finances at the same time are so bad, they need a bailout from the government. So the government has to guarantee a $250 million loan to Lockheed to keep them afloat, mostly because of the L-1011 disaster.
It requires a vote of Congress to do this. It almost doesn't pass. This is real bad. Hmm. Oh, I didn't realize how dark it got there. It got real, real dark. And again, it was only the profits from LMSC that kept the company from probably going under. Hmm. So, okay. We've mentioned stealth a few times here. Back to Skunk Works. There is one more great Skunk Works airplane, and it is under the administration of Ben Rich, Kelly's successor.
One last hurrah, at least for the traditional Skunk Works organization. So there's a math paper published in a Russian journal. Around mid-1970s, right around this time. Which I think gets published because the Russians don't really see anything of value in there. They don't really know exactly what these particular equations that are getting published could be applied toward. But somebody at the Skunk Works reads the paper and says, huh, I think all the ways that we've been thinking about trying to make an airplane stealth, like the SR-71, with flattening the bottom a little bit and trying to use particular materials and paint and stuff like that, I think it's good.
But if I apply these equations to make a stealth aircraft, then I think we can do something two orders of magnitude better than anything we've done before. And I think we can make an airplane go from looking smaller than it is, like a bird on a radar, to something like a BB on a radar. Or a ball bearing, famously. Or a ball bearing. So that Skunk Works employee was then 36-year-old Dennis Overhauser, who was a mathematician.
And he, like you said, reads this paper and brings it to Ben Rich, who just six months earlier had taken over from Kelly as head of Skunk Works. And he's told, don't stick your neck out. No one's getting the crazy amount of rope that Kelly had. So, prepare to just be Lockheed's yes-man, and we're going to use the Skunk Works for branding and marketing, but we're not doing anything too nutty in your little shop over there.
And even Kelly himself, he's retired, but he stays on as an advisor, so he still has his fingers 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. And in particular, because when you apply these equations to design an aircraft, the way you have to design it makes it incredibly not aerodynamic.
If it works, it will be a thing that is invisible on radar, but Kelly sort of looks at some of the early sketches of what you would have to do to make this thing into an airplane and basically thinks, that's not an airplane. That won't generate lift. He's such an aesthetic snob. He's like, that's not an airplane. We can't make it. It doesn't look beautiful. And it's not just that it doesn't look beautiful. It's that literally there's like only a hint of Bernoulli in there.
The way that it's shaped is unclear that it will generate enough lift to lift itself. Yes. Also correct. Or, well, I think the bigger problem was less about lift, although I'm sure that was a problem, but more about could you control it? Yeah. Could you fly this thing? So what's being proposed here is basically an enormous looking cockpit, this big globular fuselage. And you can Google the F-117A. The name is the Nighthawk. It's like stubby wings.
It's these two little super thin tall tail fins. It looks super unstable. And the whole thing has basically zero round surfaces on it. It's faceted. I mean, it looks like a diamond. In fact, its codename, or I would say probably not its codename, but its nickname internally was the Hopeless Diamond. You know what this thing looks like if you aren't already intimately familiar with images of it? I actually think it looks really cool. Totally. But it doesn't look like it'll fly or fly in a controllable way.
It looks like you made an airplane, like a paper airplane, and then you put a rock on top of it. And you were like trying to get that thing to fly. Totally. To me, it looks like the planes in the first Star Fox game for the Super Nintendo. When Nintendo and other 16-bit game developers during that generation were trying to make 3D games with 16-bit hardware. And you didn't have enough processing power and polygonal power to make rounded shapes.
So you had to have flat surfaces. These big-ass triangles. Big-ass triangles. That's what this thing looks like. It literally looks like not a Star Fox 64. A Star Fox Super Nintendo plane. Right. So Ben Rich decides that he wants to put his career on the line. Yeah. And take a risk and make this. So he goes to the Air Force. The Air Force says, well, you know, on the one hand, your timing is good. We actually also think stealth technology is worth pursuing.
We have an active RFP out there. We didn't come to you guys because Skunk Works hasn't made a fighter plane in God knows how long. You guys just had layoffs. We don't like the Blackbird. Sorry, you guys are old news. Ben Rich, like you said, he risked his career six months into the job pursuing it at all. He risks it even further. He goes back to Lockheed Corporate and says, I want to pursue this and make a prototype anyway without a research contract.
We're going to fund this internally. Which this is not something that defense contractors do. No. We'll talk about this as we get into playbook. But it's not like a tech company where you do a bunch of forward-looking R&D and then amortize it over a bunch of customers later. You go bid on a contract, you get that contract, and then you build the thing. It's so funny, you know, reading less so in the early history. But when you read about Lockheed today and the industry today, there's all this talk of the customer.
The customer, there's only one customer. The DOD. The DOD is the customer. It's like the Amazon, like, oh, the empty seat for the customer in the room. It's not a metaphorical customer. It is a specific customer. No. It's like, what does the Pentagon think? Which is a good and a bad. They're unbelievably customer-focused. Lockheed Martin doesn't build stuff unless the U.S. government says, I'll order it. Which means they don't have to take a lot of risk.
But on the other hand, they also don't get the upside from taking risk, typically. And this is how crazy this situation is. It is literally the opposite of what you just said. This is Ben Rich's neck on the line. This is Skunk Works on the line. This is everything. So they go and they build a prototype. It's nicknamed the Hopeless Diamond. The codename is Have Blue. H-A-V-E-B-L-U-E. And I mentioned ball bearings earlier. They make a model of this thing, a wooden model.
They put it up on a pole. They test it in a radar range alongside the other prototypes from other contractors for a stealth fighter that the Pentagon has put out. And this thing is invisible. The way that the Air Force inspectors come up with testing it is they get a set of ball bearings of increasingly smaller diameters. And they attach them to the nose cone of the wooden model at the radar range. And they see if you can detect the ball bearing or if it's blacked out by like this massive plane model behind it.
And they can detect a ball bearing down to a diameter of an eighth of an inch. So the radar signature of this plane is less than an eighth of an inch sphere. It's unbelievable. The thing is all flat surfaces. So it basically bounces the radar everywhere except for the transmitter receiver that is actually shooting the radar waves at it. So will it fly and can you control it are still open questions. But we now know that it is like, oh my god, radar invisible.
Yeah. So out of that, the dark horse, Skunk Works, wins the contract to build the Air Force's stealth fighter. They do. They solve the challenges you just mentioned and they solve them with computers. For the first time, or at least that we know of really the first time in Skunk Works history, the way you control this thing is with fly-by-wire, which I'd heard that term before. But fly-by-wire means that the plane's systems are controlled by a computer.
And when you move the controls as a pilot, you are not directly moving the mechanics. The computer decides how to translate your intentions into stabilized movements for the plane. Power steering. Exactly. Well, yeah, 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.
Yep. So they win the contract. They start testing this thing at, of course, Area 51. And the stealth fighter really looks like an alien spaceship. I don't blame all these people with the binoculars who are pretty sure there's aliens. I don't blame them either. The Air Force starts taking delivery in 1983 of the stealth fighter from Skunk Works. They ultimately buy 59 of them, of the F-117A Nighthawks, at $43 million each. So that is $2.5 billion in revenue for a Lockheed, a time when they desperately needed it.
And Skunk Works desperately needed it. Huge win for Ben Rich. Huge win. The real combat debut for the Nighthawk is during the Gulf War, during Operation Desert Storm. So that's, what, six years that they keep it undeployed where they have it, but the U.S. government has decided that we want to save it. Well, where are they going to use it? We're not really fighting any wars. And this is a fighter. This isn't a reconnaissance plane. This is a fighter slash tactical strike plane.
Which, again, Skunk Works hasn't built one of those since, I guess, what, the 104 Starfighter? I think that's right. I mean, yeah, the F in F-117 is fighter. The SR-71 was not an F plane. So the plane is never really tested in combat of what it can do until Operation Desert Storm. And I remember watching this live when this happened. I don't know if you remember this, Ben, but I vividly remember when this happened. The first night of the war, Operation Desert Storm.
I mean, this is broadcast live to the world. The U.S. Air Force completely knocks out all of Baghdad's defenses and infrastructure. And the way they do it is with the Nighthawks. They came in under the dark of night. No one knew they were coming. They hit a bunch of the high-value targets. And then these wars now tend to be these overwhelming force at the start. And then long, long drawn-out battles after that. But this set the stage for what the modern military engagement looks like.
Yeah, so a few quotes here that are in Skunk Works. First from the Secretary of the Air Force at the time. We learned that night, the first night of the Gulf War. And for many nights after that, that stealth combined with precision weapons constituted a quantum advance in air warfare. Ever since World War II, when radar systems first came into play, air warfare planners thought that surprise attacks were rendered null and void. And thought in terms of large armadas to overwhelm the enemy and get a few attack aircraft through to do damage.
Now we again think it's small numbers and in staging surprise, surgically precise raids. And then another quote here from one of the pilots that flew that night. To put it in domestic terms, if Baghdad had been Washington, that first night we knocked out their White House, their Capitol building, their Pentagon, their CIA, their FBI, and took out their telephone and telegraph facilities, we damaged Andrews Air Force Base, Langley, and Balling. And we punched big holes in all the key Potomac River bridges.
And that was just the first night. So this thing is deadly. The Nighthawk very much worked. The Nighthawk flew 1% of the air missions in Desert Storm, but accounted for 40% of all damaged targets. And so while this plane was a massive success for what it was intended to do, this is where I sort of want to stop glorifying some of the military might the way that we did in the Cold War, which was like obviously for deterrent.
This is when the foreign policy sort of changes a little bit in a way where you're... Yeah, people are dying here. Yeah. This is the incredible paradox of this. Because the most overwhelming and terrifying weaponry ever created and weapons capabilities ever created was never used and was created so that it would never be used. Right. It's fascinating. Yeah, totally. But here, this stuff is used and a lot of people died. For the F-117A, 10,000 people worked on this airplane, the Nighthawk, and kept the secret for 21 years until it was declassified.
Wow. Crazy. Yeah. Let's just divorce any value judgments here for the moment. In terms of the airplane itself and Lockheed and Skunk Works and the company, while Desert Storm was, on the one hand, this great success story for the airplane, there's also kind of the end. That's the end of the Cold War. Yep. There is no doubt after Desert Storm and all the other things that happened and the falling of the Berlin Wall by the early to mid-90s, it's done.
And this success of the Nighthawk and success of the U.S. military from a military standpoint during the Gulf War, you know, that sets the conditions to bring us to the modern era. And Lockheed today, which is not Lockheed, but Lockheed Martin. And Boeing today, which is not Boeing, but Boeing and McDonnell Douglas and this incredible era of consolidation. Consolidation. Right. And Northrop, which is not Northrop, but Northrop Grumman. And which very closely, almost, was part of Lockheed Martin, but got blocked by the DOJ.
Yeah. And then you have Raytheon and General Dynamics, which have eaten their fair share of all the other competitors, too. So, the Gulf conflict, I think, ends in 91, I believe. And it becomes really obvious that the Cold War era of arms buildup in the U.S. is over. And defense budgets are going to shrink massively. And we need to start nuclear disarmament. We need to start destroying a lot of the nuclear warheads that we build. Right.
And everybody in the industry knows it. And then it becomes super explicit. This is kind of an amazing event that happens. In July of 1993, the then Deputy Defense Secretary, William Perry, calls the CEOs of all the major crime defense contractors to a dinner in Washington, at which he explicitly tells them defense spending is going to shrink massively. Duh. You know that. And he instructs the CEOs present that you all need to consolidate and start merging with one another.
We, the Defense Department, are no longer going to be able to feed all of the metaphorical mouths at this table. And the CEO of then Martin Marietta, soon to be Lockheed Martin, refers to this dinner, tongue in cheek, as the last supper. And indeed it was. This is an amazing event. Literally, a government agency just told an industry what to do. This doesn't happen in America. Very explicitly. And this was rumored for a long time. People were like, wait, did this really happen?
The U.S. government instructed these big companies to become anti-competitive, to all merge together. And this 1993 thing really kicks off an era of intentional government policy around combining companies. Yeah. Which is very odd. American industry, and I think as we saw during the Cold War era, America functions on competition and thrives in competition. And here the government is saying less competition. And in part, they're basically saying, look, it's an acknowledgement that a lot of the times companies thrive because they're in growing markets.
And this is now a shrinking market. And so what do you do if you want to maintain America's military industrial base, but you know for a fact the market is shrinking this year and likely every year for the next decade or two? Like, what do you actually do? And so I think the intent here is to say, we don't want to lose capability. We want the U.S. to remain a country that has a whole bunch of people that know how to build this stuff.
So if we need it, it's there. But you're going to put each other out of business because we just won't have enough for you. So you need to 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, 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. Yep. So this sets off an amazing series of events, kind of similar to hearkening back to the LVMH episode when Louis Vuitton and Mouet Hennessy merged, not because they liked each other or because there was a business reason.
They merged for like practicalities and to avoid dying and getting taken over by hostile raiders. In 1993, Lockheed buys General Dynamics fighter jet business that we already talked about, the F-16 business. And then in 1994, the big shoe drops. They announce a quote, merger of equals with Martin Marietta. That goes through in 1995. Except they didn't merge everything about, there's two spin outs of the Lockheed Martin combination. One is there's another set of things that Martin Marietta does around minerals and mining.
And so there's literally a Martin Marietta company that's publicly traded today that still exists that's around mining raw materials. Do you know this because you looked up the mine safety disclosures? I was disappointed to see that there were no mine safety disclosures in Lockheed Martin's financials. There's another thing that spins out called L3 communications, which is the set of things that won't be combining into Lockheed Martin. And this has actually become a fairly formidable competitor today.
There's the five big primes, Lockheed Martin, Boeing, Raytheon, Northrop Grumman, and General Dynamics. And L3 is kind of growing, which is fairly unprecedented in this era of primes. But you might be saying, what is the L3? Well, there were three L's involved in creating this company. One of them was the investment bank that helped combine them. Lehman Brothers. Yes. Frank Lanza, Robert LaPenta, and Lehman Brothers are the L's. So the assets that do merge of Lockheed and Martin in January 1996, shortly after the big merger goes through, they then acquire the defense business from Loral for almost $10 billion.
And then, as we said a minute ago, in July 1997, they attempt to merge with Northrop Grumman. Right. This is like Lockheed Martin sort of like looks at the DOD and they're like, are we supposed to keep going? Yeah. Like, you told us to do this, right? Yeah. They misread the tea leaves on that one. That merger gets announced. Everybody'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. 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-2 bomber and the B-21, 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 1997, Boeing merges with McDonnell Douglas and becomes the giant that it is now. Do you know why that happened? Oh, I do not. So we're going to talk here in a second about the F-22 program and the F-35 program. We'll skip over the F-22 for the moment just to hit this point.
For the JSF, the Joint Strike Fighter F-35 program, this is going to be like the biggest ever military contract. And so it's really worth going for. And there's three companies that are worth gunning for in the mid-90s. There's Lockheed Martin right after their combination. There's Boeing and there's still independent McDonnell Douglas. 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 McDonnell Douglas after McDonnell Douglas loses kind of need to just combine and size up in order to be a formidable competitor to Lockheed Martin going forward. Do you know the size of the F-35 Joint Strike Fighter program, like in terms of dollars? I do. It is a $30 billion DOD contract for 398 airplanes just for the U.S.
We'll talk about that in a minute, but it was a prize worth going for. So yeah, if you lose this contract, this is literally life or death whether you get this or not. Right. So losing this creates some extreme combination. And obviously this sets the stage. I'm going to hand it over to you in a minute to lead the discussion of all the dynamics around this and the military industrial complex and defense contractors today. But to set the stage, I have a few quotes from Norm Augustine, who was CEO of Martin Marietta where the merger happens.
And Dan Tellup, the CEO of Lockheed, is the first CEO of the combined company. Dan came up through LMSC, started there, worked in LMSC for decades, and then became the CEO of Lockheed. He's the first CEO of the combined company. And then Norm takes over for a few years after that. In 1997, Norm is a character. He's a serious character. He writes a Harvard Business Review article. I want to read a few quotes from this. Following The Last Supper, which he termed it The Last Supper, it became evident that there were only two potential survival strategies.
One was to move into new markets. He's meaning commercial markets. A difficult and time-consuming option that has rarely succeeded. And as we talked about, definitely Lockheed tried that in the 70s and failed miserably with the L-1011. The other strategy entailed something almost as difficult. Increasing market share in existing markets during a period of severely declining businesses. Duh. This is what we're talking about. And he says, here's what happened. He just lays it all out here. Lockheed soon purchased General Dynamics Aircraft Business and Martin Marietta purchased General Electric's Aerospace Business.
All told, our company comprises 17 previously independent entities, like independent until recent times as he's writing this. General Dynamics, Sanders, Gould Ocean Systems, GE Aerospace, RCA Aerospace, Xerox Electro Optical Systems, Goodyear Aerospace, Fairchild Westin, Honeywell Electro Optics, Ford Aerospace, Libra Scope, IBM Federal Systems, Unisys Defense, Lockheed, Martin Marietta, and L'Oreal. What a Franken company. As we've been alluding to, these were not very profitable entities. So Lockheed, at the time of the merger, did $13 billion in revenue and only $422 million in net income.
Martin Marietta was slightly more profitable, did $9.4 billion in revenue and $450 million in net income. So both of these are like 10% or less net income margins. Yeah. And you basically have a situation where like all these contracts kind of go to all of the contractors. They just rotate around who's the prime on it. And the prime makes the most money and then it has the most sort of sway and you don't want to be with a subcontractor.
You'd rather be the prime contractor. But still, this current military industrial complex is very, all five players are basically in on all the big contracts and the government's very aware of that and the companies are all very aware of that and it's sort of reached this stasis. Yep. So Ben Rich basically called it in 1992 when he was talking about, this is at the end of the Skunk Works book, about the end of the B-2 bomber program.
Which by the way, the B-2 was kind of a make good when they gave that to Northrop Grumman. This is the stealth bomber. Yeah. By all means, that should have gone to Lockheed Martin. They had the expertise from the F-117A Nighthawk. And I mean, this is the Lockheed side of the story, but they beat the B-2 in a lot of the early competitions. But the government still gave the award to Northrop Grumman because there was some particular plane that the government said Northrop could manufacture a bunch of and then sell internationally and then change their mind.
And so then Northrop was sort of left holding the bag. And so it was the Department of Defense being like, all right, you can win this competition. And who knows if any of these things are true. That's Lockheed's side of the story. But anyway, Ben writes, 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. Yep. so I think that sort of 1992 Ben Rich publishing the Skunk Works book then The Last Supper it basically marks the end of Skunk Works Skunk Works is still a term that is used to describe a part of Lockheed Martin but is it the Skunk Works of the 50s, 60s, 70s?
no, not at all it's a completely different thing and airplanes are just not built by small teams in this sort of auteur way the way that they were in Kelly's era so let's talk about some of these huge programs these large fleets of planes that the US government has bought in recent years and we'll start with the F-22 and this gives you a sense of how freaking long these time frames take so in 1981 the Air Force identified a requirement for an advanced tactical fighter to replace the F-15 Eagle and the F-16 Fighting Falcon so that sort of kicks off this we're going to need some future thing in 1985 the initial order and I don't know if it's technically an order
or how it sort of changes over time but the initial pseudo commitment is for the US government to buy 750 planes of what becomes the F-22 Raptor for $44 billion in the total program cost wow that gets revised down again, an airplane has not flown yet just before 1997 to 339 planes that's going from 750 to 339 for $62 billion in total program cost that cost went up even though the number of planes dramatically went down to like half I was wondering I was like did Ben misspeak there?
Nope then the F-22 program is over it was a big thing in the Obama administration where he basically said I'm going to veto anything that comes to my desk for any more Raptors 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 750 to 339 is 187 planes delivered they kept the $62 billion total program cost fixed they managed to do that wow so each plane ends up costing $360 million if you amortize all the R&D against the very few airplanes that they ended up making wow I mean the F-22 much like the SR-71 there's not much we can complain about with the plane it is a badass plane
in fact for Seafair here in Seattle the last few years they've had an F-22 it is an unbelievable thing to see live it performs maneuvers that just look alien I mean you just don't understand how the physics makes it work it was all about air superiority it was all about speed they took all of the stealth lessons from the F-117 and put it into a very fast air dominating airplane so the stealth fighter the Nighthawk was angular and looked like a Super Nintendo Star Fox plane because the computational ability to model it at the time it wasn't that you needed to have just flat surfaces it's that you could have three dimensional rounded looking surfaces you just needed to be able
to model it for the radar signature and computers weren't advanced enough at the time to be able to build a 3D modeled version of a radar stealth structure as they advanced you are now able to do that in much the same way that in video games you can now build lifelike looking 3D models out of the same polygons before and so the Sega I think it was the model 3 arcade board yep that we talked about that was part of the real 3D revolution in video games they used it in the arcade cabinets right the cutting edge better than home consoles computers Virtua Racer Virtua Cop Virtua Fighter being the big one were on that Sega co-developed those boards with Lockheed Martin
in order to model the stealth airplanes yes unbelievable that is insane so fun so what we can see here is sort of the classic modern boondoggle is probably the wrong word but program gone awry where there's a sensible total program cost for making a lot of airplanes and then as there's more pressure on the budget over time and there's cutbacks that happen you end up making less and less airplanes and so it's really hard to amortize all the R&D costs and because of the way that these contracts work it's not the tech company that's left holding the bag it's not the contractor holding the bag it's total cost plus model the company the contractor Lockheed doesn't take any risk and so
who's holding the bag the government's just paying more for each airplane rather than you know you could imagine if I was Apple and I sunk a billion dollars into developing the next great device and then no one bought them I'm out a billion but in this scenario the government's like look I told you I'd pay that much I'm paying that much and unfortunately I just can't spread the R&D across as many units wow it's the R&D but also the tooling like we were talking about with the Blackbird totally the infrastructure that you need to spin up to make a new airplane is a lot right following Ben Rich's sort of hey I think this is how airplanes are going to be
made in the future this happens in 46 states the F-22 is built in 46 states yes and it requires 95,000 jobs which in some ways is good it's good to employ people in other ways the reason that some of these projects get funded is because it creates these jobs and the reason that it's in 46 states is because that way basically every member of congress is incented to vote for it you're talking about pork barrel politics exactly so I think Lockheed has become world class at understanding where their bread is buttered yes their customer is the US government but the people approving their funding are individual people these members of congress who all want to get reelected and so Lockheed
spreads all these operations around they employ all these people and members of congress love nothing more than creating jobs for their constituents and they hate nothing more than participating in a vote that eliminates jobs and so congress can kind of be simplified to 538 principal agent problems and contrast that with the team of you know what 50 engineers and 100 machinists that built the U-2 yeah of course the F-22 is a much more advanced airplane than the U-2 but the size of the engineering challenge relative to state-of-the-art technology was way less than the size of the U-2 engineering challenge relative to state-of-the-art technology yep so then there's the next program that comes along the F-35 lightning 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 going to 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 Britain and others and they say what's like a common platform that we can develop so that we can get the best economies of scale out of this thing that's the right thing for the American taxpayer and so they come up with this idea for the F-35 lightning 2 and they're going to make three models and each of the models are for a different purpose it's this
incredible piece of technology one of the three models can actually angle its engine down and take off vertically using its engine to reposition I don't think they can use this in combat but they can like use it to move itself around on an aircraft carrier it's pretty incredible to watch videos of it if you just go search on YouTube it interestingly has a different aim and mentality than the F-22 it's less about being sort of the fastest plane in the skies and much more about having the technology and the visibility to have the best information at all times it's sort of looking to the future of information based warfare more than pure air superiority and speed it's not all the
way to like a drone future or a cyber security future but you can see it drifting there really intense communications between a whole squadron of fighters intense heads up displays with digital stuff for the pilots in the cockpits and in their helmets and so it's sort of like the most technology forward plane program ever so when I say big I mean really big in terms of the number of orders that are going to be placed is approximately 3,000 airplanes worth a potential 200 billion dollars for the total program cost wow in practice it's kind of as pork barely as the F-22 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 BAA Systems from the UK makes the rear fuselage these pieces are shipped all over the globe before final assembly so we've sort of expanded it even from pork barrel in the 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-35 order is 30 billion order just from the US 30 billion dollars that's 398 airplanes that is 750 million dollars per airplane the Swiss have placed an order for six billion dollars for 36 airplanes Finland bought 64 Germany 35 Greece 20 the Czech 24 Canada 88 Poland 32 Lockheed Martin this is an
enormous win to win this program and it is among us and our allies the largest ever purchase anyone has ever made for any piece of defense equipment it's just so clear listening to you talk about that and contrasting it with everything we talked about in the story portion of the episode this is a different world than the Lockheed of World War II and the Cold War and ! the military of World War II and the Cold War like it's very unclear to me what the threat based need is here for this well yeah hopefully deterrence well I guess I don't know I'm not a military strategist but you know you mentioned drones drones are a thing now and they're a lot
cheaper yeah put a pin in that for the moment I'll finish rounding out the national defense budget just to put all this in context of what Lockheed sort of represents here so our national defense budget in the United States is 800 billion dollars as you would expect that's more than any other country in the world it's 3-4% of our GDP we spend on defense interestingly it is down on a percentage basis of when you think about like the percent of federal revenue spent on defense it's actually down back in the 60s we spent half of our federal revenue on the military and in recent years it's fluctuated between 12 and 20 percent so i think that's a little bit of
a counter narrative to people that like to complain about how much money we spend on the military well i guess it is you know to the point of consolidation in the last supper the government was clear we're going to spend a lot less we're just going to spend it in much more concentrated ! We pseudo nationalize a few companies there's these too big to fail entities that are like in cooperation with the government neither can really exist without each other and we just are okay with that we say okay that's how the system works and for better or for worse private industry and the government are tied at the hip there so a few more stats on this so that
I said in recent years the government's DOD or defense spending is between 12 and 20 percent the total U.S. government budget is six trillion dollars so defense in there at 800 billion clocks in it's actually lower than social security health care and income security wait a minute you said it was three to four percent it's three to four percent of GDP but it's 12 to 20 percent of the ! budget ! So okay we dollar budget defense is less than social security health care and income security it is more than medicare education or transportation just so people sort of know where it kind of sits there so of that 800 billion dollars about half of the defense budget is spent
on contractors like Lockheed Martin and of that 400 that's spent on contractors 50 billion goes to Lockheed they are the single largest recipient of federal spending as a contractor full stop wow not even just defense across all companies across all companies wow I knew they were the largest defense contractor but I didn't realize they were the largest government contractor period yep Lockheed then Boeing then General Dynamics then Raytheon then Northrop then McKesson wow you get to five before you even get to a health care wow so you've got that 50 billion that goes to Lockheed Martin from the federal government how much of their total revenue do you think that is oh it's gotta be like 90% it's close it
tends to hover around 75% so 66 billion dollars was Lockheed's total revenue last year of which 50 billion came from the US federal government makes sense and I get the rest I would come from foreign governments correct yeah our allies because 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 8% as we've been sort of talking about the whole time you can sort of like see the cost plus pricing right there at the bottom line of the company Lockheed Martin makes a bunch of money and at the end they only have 8% and that's basically contractually figured out I think whenever
one of these contracts gets bid out the big defense contractor says I'm going to slap 8 9 10 11 percent on top of it and that's going to be the cost and that is exactly why their financial statements look the way they do is because that's exactly how the government decides to fund which have an economist on ACQ too at some point in time to talk about it but my understanding is that while Warren Buffett and Charlie Munker hate cost plus contracts and in general they set up terrible incentives they are useful in cases where you don't know what the cost is going to be but it's a incredibly important investment to make and traditionally that has been defense expenditures
like we need it to happen we need the corona program we don't know what the cost is going to be but we need it to happen and I think that is the rationale of how we got here but it doesn't make sense when the government's buying more modern things like we're buying software as a service let's say I'm making slack and I'm selling that to the ! 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 can sort of think about here Palantir for example how do you let the government put out a contract to bid on that structured a
certain way when the way you've decided to structure your company where you do R&D up front you're willing ! That doesn't fit in these gigantic cost plus contracts in fact what it ensures is you cannot get operating leverage on your company no matter how large you scale you will never have big fat gross margins that outrun your fixed costs it's like the opposite of what every tech company is trying to do right this is sort of the great irony in the government together with Lockheed really seeded Silicon is kind of incompatible from a business model perspective right yeah someone told us as we were preparing and researching this episode that Palantir figured out that what they had to do was
sell laptops to the government that came preloaded with their software so they could sell a physical thing that had a cost of goods sold associated with it such that it could be bought in a cost plus way and to be able to buy software and technology but if you look at some of the most successful Silicon Valley style startups that are selling defense to the government whether it's SpaceX or Android or others they're selling hardware they're not selling software solutions yeah I'd say we're in the first out of the first inning and trying to figure out how to sell software to the Department of Defense which is sort of scary when you think about it because like I suspect most
acquired fans will not find this a controversial statement but I think it's quite likely that modern warfare is going to occur more in software than in hardware just like the Cold War occurred more in capabilities than actual fighting yeah and it's probably fair to say I didn't talk to anyone at Lockheed I'm not judging anyone who software engineer you're probably going to go to a more interesting modern company and that's why you see the andurils of the world and the palantiers of the world kind of sucking up top talent that has this as a thing that they're really passionate about working on yeah there's also a huge difference now versus certainly World War II but also the Cold War the
motivation of people who are going to work at Skunk Works they were doing it out of patriotism for their country like the clear and present threat of the Cold War was an extremely motivating factor that's not there in the same way today very different time we live in very very different time or at least there's a perception that it's a very different time that we live in I don't really know for sure if it is or not well which is so funny about this whole thing the Cold War and now perception is reality nobody really knew then and nobody really knows now what the reality of the threat is but the perception is what drives people's behavior and that's what
drives the economy it is in the government's interest for everyone to feel safe and secure and so you can sort of rise above Maslow's hierarchy and do other stuff enjoyable lives and go to work and do things that aren't for defense and drive the economy forward it is also in the interest of the country to make everyone a little bit aware of how we have this incredible quality of life in the U.S. And I don't think we're indexed in that direction even 1%.
I think as you talk to people there's a lot of reasonably oblivious but well intentioned people who are like not willing to give the credence to America's incredible military of why we get to enjoy such charmed lives in this country and a lot of people that want to like go la da da we live in this amazing globalized wonderful world where no one needs to think about the military at all and you're like do you live on this planet the default state of humans technology changes human nature doesn't right unfortunately there's some set of people who want to like come and take your stuff and in the same way that price is set in a market by the
person who is willing to pay the most the need for security in the world is set by the person who's most willing to come take your stuff and that's how much defense you need to have in order to stop them from coming and taking your stuff and hopefully you don't need to get into armed conflict over it but I do generally feel that there is a disconnect between people who enjoy the way of life that we have but are unwilling to acknowledge why we have it and I think that is extremely different today than it was 60 years ago !
I totally agree with everything you're saying I also think there's another layer to this which is really a huge theme of this journey with the research and doing this episode for me with Lockheed and that is the phenomenon of competition and its impact on human behavior probably for both the Soviet Union and the U.S. although I'm less equipped to talk about the Soviet Union the fact of that competition led to tremendous advances for society I mean all the things we just talked about Silicon Valley itself for God's sakes wouldn't have existed without this so there is sort of a rational argument for having an adversary technology and society was pushed forward in America by the Cold War and by Lockheed
as part of that yeah all right listeners now is a great time to talk about one of our companies Statsig yes long time acquired partner there is a reason why the best product teams at companies like OpenAI and Notion Atlassian Figma Rippling Brex and more rely on Statsig whether they are iterating on their core product features or shipping AI powered experiences at scale yep in the crazy speed of today's AI world shipping fast is just table stakes now it's basically trivial to build and deploy your app constantly the real advantage is how quickly you learn what changes actually created value for customers and how fast you can use that signal to guide what you ship next whether it's a feature
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! There's Aeronautics which in theory contains Skunk Works so that's F-35s F-22s the old F-16s the C-130J Hercules airlifter the F-35 I believe is the largest program generating 20% of all net sales across all segments like you said it is enormous right it's 66% of 2022's revenue in that Aeronautics division so like Aeronautics equals F-35 there's also missiles and fire control then there's three rotary and mission systems which contains helicopters and they bought Sikorsky so it contains Sikorsky the other helicopter company and then four is space which includes the Orion capsule that's evolved over the decades and 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 that was sort of forced upon both Boeing and Lockheed Martin where they both independently were developing launch capabilities for the U.S. government this is especially pre SpaceX or before SpaceX was as powerful as it is today the U.S. needed to contract launch services from someone and so Lockheed and Boeing were both developing them that didn't go terribly well and they ended up asking for bailouts from the government and the government said can you two combine and Lockheed Martin and Boeing came back and said are you kidding me with that guy no these companies hate each other and so but they agreed to do it because they kind of had to and so ULA is sort of this shotgun wedding
between the two companies which as we talked about on the SpaceX episode really opened the door for SpaceX to come in and compete totally and the reason they didn't go well was because in sort of the pre SpaceX era there were all these companies that wanted to put stuff in space that all ended up going out of business you think like Teledesic Iridium a lot of bankruptcies and so Boeing had tooled up this huge factory Lockheed had done this too and so they were left holding the bag and it got really ugly Boeing was caught trying to steal proprietary data from Lockheed Martin ultimately this JV has gone well ULA is going to 2x their capacity to 25 launches a
year which is way more than they used to do but they started from big incumbents rather than starting from a startup joint ventures are not permanent things and these companies can't continue to be in business together so ULA is up for sale and it'll be very interesting to see if one company or the other ends up buying it but it is an important part of NASA's Artemis program and others moving forward it's also important to Amazon a whole bunch of the Kuiper launches are happening on ULA oh interesting is that because Bezos doesn't want to launch on SpaceX neither company will really like say anything about that it's gotta be something in there billionaire competition yes so those are the
four segments much like our Sony episode and I'm pulling forward a playbook thing here this is a pretty well diversified conglomerate I mean fighter jets are their bread and butter at 40% of overall revenue but missiles and space are each 17% and rotary mission systems are 26% and all of them are 9-14% margins so they all are double digit percentage of revenue and double digit percentage of profit so congratulations we've got a conglomerate all right well let's head into our analysis section and this will be to kind of pull together a lot of the strings that we've mentioned on this episode but codify like what are the real takeaways and like let's understand this business and this institution and what
it is in our world today to kind of tie together some of the things we've teased at over the course of history here and again few caveats one we know we did not tell the entire Lockheed Martin story nor could we two this is created in his book seven powers the seven are counter positioning as a startup versus an incumbent scale economies across a broad customer base switching costs versus other near competitors network economies process power branding and cornered resource I was really smiling as you were defining that as persistent differential returns versus their competitors because I'm not sure that Lockheed has differential returns versus their competitors
I don't know that there's really a market here yeah and power kind of comes only in markets yes correct for this maybe it's more useful to talk about the prime contractor industry as a whole versus any specific player well all the players have the same profit margins too I guess where I'm going with this is I think there's a cornered resource and process power that the prime contractor industry as a whole has the cornered resources they are the ones that get the prime contracts from the government and then the process power which I think probably is really legitimate we talked to some folks in preparing for this they are incredible systems integrators at what they do what did you say
they're 4,000 or 3,000 subcontractors for the F-35 something like that it's nuts to orchestrate that and coordinate that into an airplane that does the things that that airplane does in practice that's hard I can't believe it's not all made by the same company the fuselage is made by a different company than the wings are you freaking kidding me and that thing works didn't you say that different parts of the fuselage are made by different companies yes on different continents yeah there's definitely process power in that you can't just pick that up out of lockheed and go put it somewhere else and expect it to function right yeah there's a hundred years of know-how and 50 years of very well-honed ways of
engaging with the customer here the customer again being the pentagon right the customer it's like big brother the customer I think you're right that we should think about it as the primes versus everyone else it's really hard to become a new prime yep maybe impossible you know palantir has sort of done it I guess andruil is kind of doing it but these I think are still pretty small scale compared to the big primes the 50 billion dollars of spend that the one customer has with the one company yeah it's really hard to break in and be a prime yeah I mean it's funny like lockheed versus northrup there's not counter positioning really there's not scale economies because there's one customer
to amortize costs across but you're actually not doing any fixed cost stuff your customer is absorbing all the fixed cost stuff too switching costs I guess but every time there's a new program they rebid it out and the government's typically excited to give it to not the incumbent because they actually they want to rotate these programs around so fighter jets are typically not made by the same company two generations in a row although Lockheed Martin has sort of shown with the F-22 and the F-35 that they have won that I think you're right on process power broadly but is Lockheed Martin's process versus Northrop Grumman's process no branding I don't think matters here really I mean in cost plus contracting
you're just actually not willing to pay more to one company than the other so cornered resource no not versus each other right so there really isn't power yeah within the industry but to the extent that you have already become one of these five then together the five have power versus new entrance which is so funny you know you really I think kind of nailed it at the beginning when you said this isn't a market it's not a market and I guess duh obviously it's not a market because there's only one so as we drift into playbook I think the lens I want to take on this is what are the big takeaways like if I'm really sitting here stewing on
all this thinking about what matters in this episode one of the big ones is that Lockheed Martin has a dual purpose for existing there's all the normal stakeholders involved customers employees and shareholders that they want to produce value for but America and its interests which causes some interesting second order effects and one being what is the optimal number of competitors in the space the government tries to optimize this as a heavily interested party but before 1993 there were way too many competitors after 1998 they determined we don't want to have any fewer competitors but it's sort of odd that there is a force that is not the market that is dictating how this plays out because that force in this
case the US government is sort of in charge of all of our well-being in a way where they don't trust that the market will look out for that and when I say that I mean if you left a free market to play out what would happen is A you'd sell arms to our enemies which the government doesn't want B might lose our industrial base people would start outsourcing to other countries we would potentially lose capability if the government stopped buying it for 10 years but we wanted it 10 years later and we got in a war oh this almost happened right the government didn't let Lockheed go out of business in the 1970s this was right as the Kennan satellite
project was getting going we could not let ! Lockheed go out of business because we needed that right so a market cures a lot of problems like price serving the best product to customers you know there are exceptions on all these things but it doesn't solve for making sure that America stays globally competitive and so the government has to put their hand on the scale and all these different ways in this market for that reason yep well globally competitive !
That's probably the right way to put it there's a second thing here which is we literally fund these companies to keep them alive so that they keep employees trained should we need the employees trained which is like something that doesn't really exist in other markets which also is a huge part of the military side of this complex right of the 2 million people employed ! it's to keep people in reserve literally that's not a market driven organization nor I think would anybody argue it should be right yeah this gets into sort of the 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 ! employed there and know there's this second one which is like it's literally a jobs program where you have congress people as we mentioned earlier voting affirmatively for things because it puts jobs in their state this is kind of the most pernicious argument of any of them for a pro big military industrial complex and in particular in this book that you and I both read profits of war the book basically just argues acting in their own self interest and not for the country's self interest it is as far to the side of the scale of like the military industrial complex is bad and evil is the profits of war book
right so this is an excerpt from that book the irony is that almost any other form of spending from education to health care to mass transit to weatherizing buildings even a tax cut creates more jobs than military spending and that just falls on deaf ears over and over again with these programs F-22 in particular as that book points out this like it creates lots of jobs that argument continues to win the day this 95,000 people are required to build the F-35 it's like oh good jobs for Americans and like that is a terrible reason to fund something right it's kind of like I'm thinking about the recent period in tech companies in Silicon Valley that we are mercifully exiting out
of now where it was all about employee headcount and capturing engineers and Facebook had God knows how many people working on Oculus and like why you know that was the equivalent of the F-35 yeah I Google sort of cornering resources on really smart people despite the fact that they 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 exists and will persist it's interesting right two things one I think that was maybe in part from observing what was happening in the
very naively puts forth the solution is an engaged and vigilant citizenry a populace especially this day and age where things are so complex that's kind of not possible is the average person really going to dive into the details of how the F-35 program works like no right that's not a good outcome either if everyone's preoccupied and keeping an eye to make sure big complex doesn't get too complex right another one I've been thinking about which is a parallel to our SpaceX episode where if you'll remember on the SpaceX episode we talked about and gosh that was a lifetime ago three years about how NASA prioritized safety over everything else and so they took that to such an extreme where things
could happen on a 20 year time span instead of a five year time span and SpaceX came in and said what if we do it on a rocket and we're happy to explode some rockets not with people on them and you sort of take this again much more Silicon Valley approach to rapid iteration testing your own prototypes internally being okay showing off your failures and gathering data from them whereas NASA couldn't do enough calculations before it finally was willing to do something to let something go to a launch pad and that would cause extreme delays massive budget wasn't safer that's the important thing here in 130 or whatever it was space shuttle missions there were two that were tragic loss
of life calamities and so you look at that you're like that's actually not a great safety record so maybe this isn't the right way to do it maybe calculating something to you know 15 significant digits of unlikely to fail is not actually the best outcome and it very industrial complex where we're willing to sign a contract for airplanes that we get in 25 years because there are these big huge productions and it's just the opposite of the skunk works way of operating where test your own prototypes do it rapidly start moving up and up and up crash some planes in the desert but overall we're going to get to the same outcome much faster on a much lower budget and
maybe with equivalent or better safety 100% well I can't think of a better place to talk about and what I think are really like the takeaways for me at least and I hope for many people listening of this episode and it's really like the heyday glory days whatever you want to call it of Lockheed both with Skunkworks and LMSC of how these small skunkworks type organizations achieved unbelievable unfathomable things with a small number of people in an unrealistically tight time frame with very constrained resources and that mindset is certainly not the only way that you can achieve great things but it's a really damn good way to do it and that mindset got injected into Silicon Valley by these people
by the military and by Lockheed and it's just so funny that the military industrial complex has now become the opposite of that has become like what you're talking about with NASA again there's many ways to succeed in different situations call for different things but like if you really need to or want to achieve something great bordering on impossible in a tight bordering on unreasonable time frame Kelly's 14 laws and LMSC's seven tenants are a pretty damn good way to do it that's so true otherwise you get to this thing that norm augustine said how unbelievably expensive these things get if you do it the non skunk works way and we just move into this larger and larger morass that we're
sort of the direction we're basically going in in these 25 year programs and he says in the year 2054 the entire defense budget will purchase ! the extra day he really is such a character 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 1983 he actually wasn't far off on the F-35 on sort of his prediction on how expensive it would be on the cost curve to exactly your point if you continue at current course in speed we basically will have only billion dollar airplanes going forward they'll be made by everybody there will be no new entrance innovation will happen very slowly
very slowly when you look at Lockheed Martin as a business they're going to do just fine for a long time no doubt about it they're an incredibly protected insulated business with an unbelievably wedded to them customer and the creative destruction cycle will happen on other frontiers there will be some existential need to create something that these companies are bad at creating and the US government doesn't know how to buy from them and the United States will have to figure it out another way and whether that's cyber security or whether that's information warfare or whatever it is whatever threatens the American way of life I have pretty high confidence the American government will figure out some way to make and it
may or may not be from one of these companies and it's very likely that the skunk works mentality ends up solving more problems for our country but probably not from the skunk works division of Lockheed Martin and you know I guess what is sort of 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 you know what that's a good way to put a threat kind of the back to the LMSC tenant number one that we talked about so long
ago in the story of focus on a threat based need I maybe want to evolve some of my comments earlier about competition into that competition creates threats it's not always competition that leads to a threat human beings and organizations tend to perform at their best in response to threats otherwise how are you going to be motivated to go to unreasonable extremes if you're not facing a threat yeah no I like that nuance which is kind of a you know to this playbook of like I certainly don't want to say artificially manufactured threats but if you're building a company certainly this exists in startup world you have an implicit existential threat all the time as a startup before you reach cashflow
profitability which is like you got to make payroll and you got to like either get profitable or raise another round of funding or you're done yeah I think you're right I think we're quickly sort of teasing out there's sort of like two different things here it's Lockheed Martin exists to ensure the America this continues as we know it today current course and speed as protected as it needs to be with the types of protections we need great we know where to get that and I have no doubt that will continue happening and also there will be other motivations for people to form tight knit teams and accomplish great things and like those are going to be 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 the main takeaway but I'm curious what you I like that a lot it's probably a good thing that the nature of that motivation and the introduction of those threats to spur human ingenuity and creativity has moved for now at least mostly out of the war arena it's probably good that it's not threat of nuclear war that is motivating people to achieve great things most people at least right now mercifully thankfully and that mindset was directly transferred from Lockheed and the military into Silicon Valley that's how Silicon Valley operates
today and that's what makes it special and it doesn't have to be because of threats of war and it's a good thing that it's not all right I think that's the right place to leave it you want to do carve outs yeah let's do it my carve out is a fun one I was reminded of because my favorite video game history podcast series 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 the series that resident arc is in the middle of is their video game storybook club going through it it was a really fun
game to play and was kind of it was really thought provoking at the time it's particularly thought provoking right now in our era of open AI and GPT and generative AI and all that so it's really fun to revisit that along with the great resident archives right now talking about the themes of that story nice you'll have like a whole niche of people that are listening to your carve outs video game ! video game wrecks totally I have two one is something that didn't quite fit anywhere in this episode but if you love airplanes and you are excited about the SR-71 you should google the SR-71 Blackbird speed check story it's an awesome story that I'm not going to spoil
for you but is about pilot jocks at their finest and a triumphant blackbird it's a joy to read it takes like two minutes I think you'll like it we'll also link to it in the show notes the second one I have is very boring carve out but something I've found surprising ego lawn tools EGO is the brand they make effectively the Tesla of lawnmowers and growing up I had like a big gas lawnmower and you like pull a cord to start it and it was loud and it was smelly and it was dirty and these are insanely powerful I have a leaf blower also that lasts like 30 minutes off of just a battery look at you you're just becoming
a dad I'm finding some like very good catharsis in I just throw on audiobook and as I'm researching an acquired episode and like go do lawn work for six hours and I find that to be greatly gratifying to get away from a screen I've chosen to go the higher gardeners route you can you also have 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 given everything that's back there it requires more technical expertise more systems integration more systems integration all right listeners thank you so much for joining us if you want to become an LP
we would love to have you help us pick more episodes like this one in the future acquired dot fm slash LP and when I get back from Berkshire I think we'll do an LP call here in the next month or so you should totally check out ACQ2 if you like hearing us interview other people I can assure you the next few one with David from retool fantastic kamakshi with her company samuha all like really fascinating discussions look up ACQ2 in any podcast player now that you're done with this episode come discuss it with us acquired dot fm slash slack we'd love to have you and particularly too I think there's a good chance with this episode that we'll have a
lot of new to acquired folks who are listening we had that in huge numbers with our LVMH episode all sorts of new people coming in and experiencing acquired and listening to us for the first time if you're doing that now here with this Lockheed episode definitely go check out some of our other episodes on other industries and I just want to second what Ben said join the slack and come talk about it with us we love hearing from people with that listeners we'll see you next time we'll see you next time time time