Lockheed Martin (Audio)

Today we bring you two absolutely incredible stories. The first is Lockheed’s legendary Skunk Works division — the elite team of aviation geniuses who produced some of the greatest airplanes in history: the U-2, the Stealth Fighter, and the incomparable SR-71 Blackbird. The second story is arguably even more important, but not widely known! It's the secret and true origins of Silicon Valley — and Lockheed’s primary role in it. We take you from WWII to the Cold War, all the way to today to unpack and analyze the industry dynamics of defense contractors in the modern era. Tune in and prepare to be blown away by what you’ll learn about the history of our industry! *Links:* - Ben Rich’s Skunk Works: https://www.amazon.com/Skunk-Works-Personal-Memoir-Lockheed/dp/0316743003 - Kelly’s 14 Rules of Skunk Works: https://www.lockheedmartin.com/content/dam/lockheed-martin/aero/photo/skunkworks/kellys-14-rules.pdf - LMSC’s “Seven Tenets”: https://youtu.be/E09qg-Kxm_M?t=8671 - Steve Blank’s Secret History of Silicon Valley: https://steveblank.com/secret-history/ - Episode sources: https://www.acquired.fm/episodes/lockheed-martin#sources *Carve Outs:* - Nier: Automata: https://en.wikipedia.org/wiki/Nier:_Automata - The Blackbird speed check story: https://www.thesr71blackbird.com/Aircraft/Stories/sr-71-blackbird-speed-check-story - EGO Lawn Tools (just in time for Fathers’ Day!): https://egopowerplus.com/power-blowers/?gad=1&gclid=Cj0KCQjwjryjBhD0ARIsAMLvnF_te03nXGYJnmGkklzqFMCy5MUSn6tmCzHz1Zj0rup-s2UtUAlESv4aAmjEEALw_wcB&gclsrc=aw.ds *More Acquired:* - Get email updates https://www.acquired.fm/email and vote on future episodes! - Join the Slack http://acquired.fm/slack - Check out the latest swag in the ACQ Merch Store https://www.acquired.fm/store! _Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions._

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00David Rosenthal?

  Those two movies are so freaking good.

• 0:04Ben Gilbert?

  Yeah.

• 0:05David Rosenthal?

  It's so shocking how good Maverick is. So many years later, in such a different environment, and then like delayed due to coronavirus.

• 0:14Ben Gilbert?

  Well, the funniest thing is when it was delayed for whatever years during coronavirus, the fighter that Maverick is in is an FA-18 Hornet, the Boeing plane. And by the time the movie gets released, it's basically discontinued. Within a couple of years, that's when they end of life the FA-18 Hornet for the Navy.

• 0:31David Rosenthal?

  Yeah.

• 0:32Ben Gilbert?

  Did you catch the Lockheed thing in Maverick?

• 0:35David Rosenthal?

  The skunk on the tail of the plane?

• 0:37Ben Gilbert?

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

• 0:42David Rosenthal?

  Mach 10 Dark Star. Oh, God.

• 0:46Ben Gilbert?

  All right, let's do it.

• 0:47David Rosenthal?

  All right, let's do this.

• 1:05Ben Gilbert?

  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.

• 1:14David Rosenthal?

  I'm David Rosenthal.

• 1:15Ben Gilbert?

  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.

• 1:58Ben Gilbert?

  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.

• 2:23David Rosenthal?

  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

• 3:04David Rosenthal?

  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.

• 3:25Ben Gilbert?

  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.

• 4:04David Rosenthal?

  We've got some awesome interviews coming up, too. ACQ2 is on fire.

• 4:08Ben Gilbert?

  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.

• 4:25David Rosenthal?

  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.

• 4:57Ben Gilbert?

  L O U G H E A D.

• 5:00David Rosenthal?

  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.

• 5:12Ben Gilbert?

  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.

• 5:19David Rosenthal?

  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.

• 5:59Ben Gilbert?

  No way.

• 5:59David Rosenthal?

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

• 6:06Ben Gilbert?

  Yes.

• 6:06David Rosenthal?

  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. That gets acquired by Douglas and becomes a big part of Douglas. Douglas, of course, is now part of Boeing. And then after that, John, as you might imagine, founded, you guessed it, Northrop, which is now Northrop Grumman. So this one dude is 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.

• 6:47David Rosenthal?

  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.

• 7:11Ben Gilbert?

  You may know Memorial Sloan Kettering.

• 7:14David Rosenthal?

  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 predictively goes bankrupt. They sell off the Lockheed division, which is actually still fairly profitable, out of bankruptcy to an entrepreneurial young businessman

• 7:59David Rosenthal?

  named Robert Gross. And this is really the founding of the modern Lockheed.

• 8:04Ben Gilbert?

  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.

• 8:28David Rosenthal?

  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. Perhaps even more timelessly, this is the plane at the very, very famous scene at the end of the movie Casablanca, when Rick puts Ilsa on the plane with Victor to escape the Nazis and says, here's looking at you, kid. That plane is an Electra, I believe, an Electra Junior.

• 9:13Ben Gilbert?

  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.

• 9:25David Rosenthal?

  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.

• 9:44Ben Gilbert?

  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.

• 10:02David Rosenthal?

  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.

• 10:23Ben Gilbert?

  It's Top Gun for engineers.

• 10:25David Rosenthal?

  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.

• 10:38Ben Gilbert?

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

• 10:41David Rosenthal?

  We keep doing this.

• 10:44David Rosenthal?

  This one, I think I only paid like 40 bucks for on Amazon. So it's not quite like Taste of Luxury at LVMH, which I think that's now like three, four or $5,000.

• 10:54Ben Gilbert?

  Oh, yeah. No, we definitely spiked the price.

• 10:56David Rosenthal?

  We did. All right. So who is this Kelly Johnson? He's basically the Shigeru Miyamoto of airplane design.

• 11:04David Rosenthal?

  His nickname is Kelly because when he was in grade school, growing up in Michigan, you know, 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.

• 11:26Ben Gilbert?

  Okay, so not Clara, but why Kelly?

• 11:28David Rosenthal?

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

• 11:50Ben Gilbert?

  You should Google a picture of this dude. He is just a 1930s man's man at his finest.

• 11:55David Rosenthal?

  And maybe the best airplane designer ever to live. That is Kelly Johnson.

• 11:59Ben Gilbert?

  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.

• 12:20David Rosenthal?

  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, like, sorry, Ben.

• 12:59David Rosenthal?

  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.

• 13:18Ben Gilbert?

  Crazy.

• 13:18David Rosenthal?

  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."

• 13:38David Rosenthal?

  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 US enters the war, the British Royal Air Force ends up buying about 3,000 of these Hudson's from Lockheed.

• 13:57Ben Gilbert?

  Yeah, this is a thing that was eye-opening to me doing the research. Lockheed's big customer in World War II before the US enters was Britain's Royal Air Force. They were a way bigger customer than the US was for many, many years.

• 14:11David Rosenthal?

  So then, once the US enters the war, and as they're gearing up to enter the war, Kelly designs the amazing P-38 Lightning fighter, which was the US's elite, fastest, most maneuverable aircraft during World War II. They made over 10,000 of them during the war, and all of the top aces in the US 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.

• 14:48Ben Gilbert?

  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 this 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.

• 15:23David Rosenthal?

  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.

• 16:07David Rosenthal?

  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 US 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.

• 16:30Ben Gilbert?

  And for anyone who's not an av geek out there or an aviation geek, it's worth knowing, going from a prop airplane to a jet airplane is not just incremental, it's an entirely different technology. You may have heard the phrase, if you've looked into this before, suck, squeeze, bang, blow. It is a completely transformative process of how the engine uses the air in order to create thrust that is much more sophisticated than just a propeller.

• 16:57David Rosenthal?

  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.

• 17:07Ben Gilbert?

  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.

• 17:17David Rosenthal?

  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 ME262, 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 P38.

• 18:01David Rosenthal?

  So the US government turns to, of course, the very best person for the job to start the US jet fighter program, Kelly Johnson and Lockheed. And they tell him, go make us a jet fighter as soon as possible and by any means necessary. And when we say as soon as possible, we want a prototype in 180 days.

• 18:22Ben Gilbert?

  Wow.

• 18:22David Rosenthal?

  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.

• 18:36Ben Gilbert?

  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.

• 18:45David Rosenthal?

  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

• 19:30David Rosenthal?

  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.

• 19:44Ben Gilbert?

  I think it was called The Skunk Works.

• 19:46David Rosenthal?

  That's right, The Skunk Works with an O. And eventually, the publisher of Little Abner sues Lockheed over using Skunk Works, so they changed it to Skunk Works. So in this circus tent in a parking lot, Kelly and this super elite team from Lockheed build the first prototype US fighter jet named the Lulu Bell in 143 days, start to finish. This is just wild. For years, the US had been working on this technology, and they hadn't gotten it operationalized. The Germans beat them to it. And then in 143 days, Kelly and Lockheed go from zero to flying prototype.

• 20:31Ben Gilbert?

  Wow.

• 20:32David Rosenthal?

  Crazy. What a testament to him and to this organization in the circus tent that he has built, The Skunk Works.

• 20:39Ben Gilbert?

  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.

• 20:55David Rosenthal?

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

• 20:59Ben Gilbert?

  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 H1B Goblin engine, and that is what they put in this prototype.

• 21:22David Rosenthal?

  Yes, this prototype, the Lulu Bell, 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 US 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.

• 21:53Ben Gilbert?

  And that is true across the aerospace industry. It'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.

• 22:08David Rosenthal?

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

• 22:16Ben Gilbert?

  Yep.

• 22:16David Rosenthal?

  So this amazing feat, building what becomes the P-80 Shooting Star and the US'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."

• 22:54Ben Gilbert?

  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.

• 23:03David Rosenthal?

  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.

• 23:31Ben Gilbert?

  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.

• 23:52David Rosenthal?

  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

• 24:32David Rosenthal?

  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.

• 25:02Ben Gilbert?

  Yes. I love this. I think this is a huge learning. Keeping your designers as close as possible to production, so the game of telephone is as short as possible, it is incredibly valuable. And having the designers being able to glance up at their desk and see like literally the way things are being manufactured, so they can say, oh, that looked good in the diagram, but in practice, you have to bring this big thing around over here. Maybe we can make that better the next time we design it. It's just such a great key insight. 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.

• 25:41David Rosenthal?

  Oh, yeah.

• 25:42Ben Gilbert?

  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.

• 26:01David Rosenthal?

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

• 26:08Ben Gilbert?

  And you see this in products in the future, too. The iPhone, the iPod, I mean, you read the stories about the early teams there, six, eight, 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 tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF, then everyone would nod and you're done. But in an AI-first world, that doesn't hold up anymore.

• 26:44David Rosenthal?

  Yep. Your risk surface changes every week now. A vendor turns on an AI feature, or someone writes in a new model without telling IT, and your posture is different than it was last week, let alone at your last audit. Vanta's own research found that around 70% of companies have this "shadow AI" running with no security review at all.

• 27:05Ben Gilbert?

  Right. And that's where Vanta comes in. They're the leading agentic trust platform, meaning they've built the thing that closes the gap. And the way that they close that gap is Vanta Agent. Think of it as a GRC engineer, that's Governance, Risk and Compliance, except that it's software and it doesn't sleep. It finds the issues, drafts the fixes, and cuts the time that you'd spend on vendor assessments in half.

• 27:27David Rosenthal?

  In half! Which is exactly why more than 16,000 companies today run on Vanta. Companies like Ramp, Cursor, and Snowflake all stay audit-ready and catch the risks that crop up between audits across every vendor, every AI tool, the whole environment.

• 27:45Ben Gilbert?

  And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance, and the work to earn and prove trust. We're huge fans of Vanta over here, and literally hundreds of Acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at vanta.com/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. All right, David. So what makes Skunk Works work?

• 28:16David Rosenthal?

  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.

• 28:54Ben Gilbert?

  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?

• 29:11David Rosenthal?

  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-

• 29:19Ben Gilbert?

  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?

• 29:28David Rosenthal?

  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.

• 29:37Ben Gilbert?

  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.

• 30:06David Rosenthal?

  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.

• 30:16Ben Gilbert?

  It's crazy.

• 30:17David Rosenthal?

  My last one is the last one of the rules.

• 30:20Ben Gilbert?

  Yes, this is one of mine, too.

• 30:22David Rosenthal?

  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.

• 30:55Ben Gilbert?

  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?

• 31:06David Rosenthal?

  So there's one more thing that isn't in any of the rules, because I think it's just sort of an 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.

• 31:40Ben Gilbert?

  Totally. And you've got to think back, this was a time where American superiority was not guaranteed. I think we have a reasonable amount of complacency today. Americans feel very secure. Sure, there are enemies, but are we going to be fine? Totally. We don't need to think about this that much. We can decide to prioritize other things and have passions and say, yeah, other people can take care of the national good. Because like, we'll be fine either way. That was not the belief at the time.

• 32:06David Rosenthal?

  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 U-2 prototype. We're going to talk all about the U-2 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

• 32:49David Rosenthal?

  it would impose on my life." This is exactly to your point. You know, with great power comes great responsibility here.

• 32:57Ben Gilbert?

  Yep. Okay, so what are the machines that sort of unfold from here?

• 33:02David Rosenthal?

  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.

• 33:19Ben Gilbert?

  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.

• 33:24David Rosenthal?

  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.

• 33:41Ben Gilbert?

  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.

• 33:52David Rosenthal?

  I think we had good reason to believe we were not going to win. So right after the war, Churchill comes to America and gives his famous Iron Curtain speech in Fulton, Missouri, that an iron curtain has descended over Europe in the form of the Soviet Union. And then before the end of the decade, I didn't really realize the timeline on this. In August 1949, the Soviet Union detonates its first nuclear bomb. And nobody believed that they were going to have the bomb that quickly or that powerfully. And not only did they have the bomb, but whether this was real or not, or positioning. People really believe that the Soviets and Khrushchev's intention is to use the bomb against America.

• 34:37David Rosenthal?

  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.

• 35:20David Rosenthal?

  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.

• 35:30Ben Gilbert?

  Right.

• 35:32David Rosenthal?

  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.

• 35:50Ben Gilbert?

  Wow.

• 35:51David Rosenthal?

  Above any other cause. Let that sink in, over half of the country thought they were gonna die in nuclear war.

• 35:57Ben Gilbert?

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

• 36:02David Rosenthal?

  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.

• 36:29David Rosenthal?

  Then Skunk Works to be the US government and militaries' primary, it sounds cliche to say, but sword and shield during this war.

• 36:38Ben Gilbert?

  Yes. So this brings us to the U-2 spy plane. And this plane serves such an important purpose that ended up being brought into service in 1955 and was only decommissioned in 1989.

• 36:53David Rosenthal?

  Yeah, incredible.

• 36:55Ben Gilbert?

  Now, there are many airplane programs that have 10, 20, 25-year timeframes.

• 37:01David Rosenthal?

  For very different reasons.

• 37:02Ben Gilbert?

  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.

• 37:14David Rosenthal?

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

• 37:19Ben Gilbert?

  Because there's no satellites yet.

• 37:21David Rosenthal?

  Oh, are there satellites? Well, 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.

• 37:30Ben Gilbert?

  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.

• 37:36David Rosenthal?

  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.

• 37:46Ben Gilbert?

  Failed weather experiments.

• 37:47David Rosenthal?

  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.

• 38:15Ben Gilbert?

  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.

• 38:34David Rosenthal?

  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.

• 38:55Ben Gilbert?

  Yep.

• 38:56David Rosenthal?

  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.

• 39:09Ben Gilbert?

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

• 39:16David Rosenthal?

  Yep, and we also thought that their radar wouldn't function above like 55,000, right?

• 39:21Ben Gilbert?

  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.

• 39:31David Rosenthal?

  Right, so the CIA's spec for Skunk Works for the U-2 is to fly at 70,000 feet. Now, there are a couple of problems with that. One is that normal jet fuel doesn't work at that altitude. You know, at that altitude, the pressure, the temperature, everything about the environment, you're getting to be closer to space than you are to normal Earth atmosphere, and things start going wrong. So that one, they actually subcontract with Shell Oil to make a new formulation of jet fuel that does work up there, so that problem is solved. Problem number two is maybe a little bigger, and that is that humans cannot survive at that altitude.

• 40:13Ben Gilbert?

  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.

• 40:22David Rosenthal?

  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.

• 40:31Ben Gilbert?

  So you basically need a spacesuit.

• 40:34David Rosenthal?

  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 spacesuit, and that's what they put these pilots in.

• 40:47Ben Gilbert?

  Wow.

• 40:48David Rosenthal?

  So Lockheed and Skunk Works win the contract from the CIA. They start working on this plane in sometime in 1953.

• 40:58Ben Gilbert?

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

• 41:05David Rosenthal?

  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 $3.5 million. That's an M. That is not a B. A year and a half and $3.5 million for one of the most important products and pieces of technology in American history. Astounding. This is what Skunk Works is capable of.

• 41:45Ben Gilbert?

  So they're flying higher than any plane has ever flown before. They're using a different type of fuel. People are flying in space suits for the first time. Feels like to be a reconnaissance aircraft, you would also need one other key component in order to achieve the mission of spying on the enemy.

• 42:03David Rosenthal?

  Yeah, to take photos, you need a camera.

• 42:05Ben Gilbert?

  Indeed. And you would need an all new type of camera with all new type of lens capable of taking photographs of something 70,000 feet away from you through, you know, a whole bunch of atmosphere. Gosh, if only the US had someone who was just incredible at this sort of pioneering optics technology.

• 42:27David Rosenthal?

  Indeed, the US did. And that was Dr. Edwin Land and the Polaroid Company, who subcontracted and created all of that. And actually, I believe it was Edwin Land himself that helped convince President Eisenhower to even pursue this project in the first place. He was like, we can build the camera that can do this. If we can get the airplane built, we can do this project.

• 42:48Ben Gilbert?

  This blew my mind. It's 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.

• 43:00David Rosenthal?

  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 build 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 secretive, 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.

• 43:28Ben Gilbert?

  And we should be clear, this U-2 spy plane looks crazy.

• 43:31David Rosenthal?

  It has 100-foot wingspan.

• 43:33Ben Gilbert?

  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.

• 43:49David Rosenthal?

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

• 44:13Ben Gilbert?

  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.

• 44:42David Rosenthal?

  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."

• 45:14Ben Gilbert?

  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?

• 45:29David Rosenthal?

  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 U2.

• 45:43Ben Gilbert?

  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. Cause 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.

• 46:06David Rosenthal?

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

• 46:12Ben Gilbert?

  A Nevada test site in the middle of the desert.

• 46:15David Rosenthal?

  Nuclear, some really strange looking flying aircraft. This is Area 51.

• 46:22David Rosenthal?

  Skunk Works creates Area 51.

• 46:25Ben Gilbert?

  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.

• 46:39David Rosenthal?

  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.

• 46:55Ben Gilbert?

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

• 47:00David Rosenthal?

  Yeah, it's so funny. Amazing.

• 47:05David Rosenthal?

  Yeah, it's all Skunk Works and the U2.

• 47:08Ben Gilbert?

  Wow.

• 47:08David Rosenthal?

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

• 47:14Ben Gilbert?

  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.

• 47:34David Rosenthal?

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

• 47:36Ben Gilbert?

  Yeah, I mean, great sacrifice to bring this program and subsequent skunk works programs into the world. But basically, what was happening is if you didn't breathe pure oxygen for two hours, you could get the bends, you know, for anyone who scuba dived and you can't fly right afterwards, from ejecting. And so it's like, well, if you managed to get out of the aircraft before it crashed, then that could kill you. So you needed to make sure that this sort of oxygenating of your blood and getting rid of all the nitrogen made it so that if you did need to eject, then you would survive this as well.

• 48:09David Rosenthal?

  Yeah, crazy. Okay, so they test the U2 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.

• 48:32Ben Gilbert?

  Of course it was.

• 48:33David Rosenthal?

  Of course it was July 4th. Now, this is so interesting. There's a whole bunch of things that happen when they take off. Like, they don't know what's gonna happen. Is this thing gonna work? Are the Soviets gonna see us? Like, we're gonna learn so much here. You can't script this stuff. The Soviets tracked it on radar, even at 70,000 feet.

• 48:49Ben Gilbert?

  The whole way.

• 48:50David Rosenthal?

  The whole way. Right from it takes off, the whole flight path through Russia, they knew everything that we were doing.

• 48:57Ben Gilbert?

  We were super wrong about their radar. They didn't just have low altitude radar. They were capable of radar that could see straight up into space. Wherever we were flying, they were gonna see us.

• 49:09David Rosenthal?

  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 U2 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.

• 49:40Ben Gilbert?

  But at least we get the intel now in the US that, okay, they can see up here. And so it's probably just a matter of time before they're capable of shooting something down up here, too.

• 49:50David Rosenthal?

  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.

• 50:35Ben Gilbert?

  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.

• 50:53David Rosenthal?

  Adversary.

• 50:54Ben Gilbert?

  Right.

• 50:55David Rosenthal?

  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 US. Because, remember, just like you were saying, Ben, nobody actually wants to go to war here. The goal is for both sides to keep each other in check. 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.

• 51:28Ben Gilbert?

  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.

• 51:40David Rosenthal?

  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.

• 51:48Ben Gilbert?

  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.

• 52:09David Rosenthal?

  We talked earlier about the cost of $3.5 million. I think you could make an analogy to like the Louisiana Purchase in terms of like best deals that the United States government ever got relative to like the benefit to America. This is huge.

• 52:22Ben Gilbert?

  Arguably the last great deal they got from Lockheed Martin, but.

• 52:27David Rosenthal?

  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.

• 53:09David Rosenthal?

  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 like, okay.

• 53:21Ben Gilbert?

  Right. What do we do? America's posture is we were never there.

• 53:24David Rosenthal?

  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. Couple of weeks go by, they say nothing. Quite surprising.

• 53:41Ben Gilbert?

  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.

• 53:52David Rosenthal?

  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.

• 54:01Ben Gilbert?

  Right.

• 54:01David Rosenthal?

  Probably the pilot was killed. Well.

• 54:05Ben Gilbert?

  That's 14 miles in the air.

• 54:07David Rosenthal?

  Yeah. No. The pilot was not killed. The pilot's name was Francis Gary Powers. Pilot Powers. If you know anything about US history, you probably know his name. And you probably know that he miraculously did survive and was captured and interrogated and probably tortured by the Russians. And that this was the revealing of the U2 program. So what happens? Turns out that there was a big summit in Paris scheduled for later in May between Eisenhower and Khrushchev. And Khrushchev announces on the eve of the summit that they have captured an American pilot. They have captured this new plane that the US has been illegally and in a provocative

• 54:51David Rosenthal?

  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 realized that like, oh, shoot, this pilot is still alive. He's confessed like, wow, this is a disaster.

• 55:09Ben Gilbert?

  Yeah.

• 55:10David Rosenthal?

  So I guess there probably was a path where this could have led to escalation. Fortunately, it does not. But it does mean that the U2 program, at least over Russia, is done. We don't fly any more U2s over Russia. We can't. I mean, if we were to do it at this point, we know they can see us. They now can talk about that they can see us and they can shoot us down. Like, it would escalate to war if we kept doing this. We have to stop.

• 55:34Ben Gilbert?

  The U2 becomes quite useful for other locations around the globe, but not over the USSR itself.

• 55:39David Rosenthal?

  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?

• 55:53Ben Gilbert?

  We're blind. What do we do?

• 55:55David Rosenthal?

  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.

• 56:21Ben Gilbert?

  Yes, and this, listeners, is where, if you've read Skunk Works or watched documentaries about Skunk Works, what we're about to talk about is not in any of those. 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 thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team

• 57:04Ben Gilbert?

  and deploying them is no longer the hard part.

• 57:07David Rosenthal?

  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. Like, the risks are real.

• 57:21Ben Gilbert?

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• 57:31David Rosenthal?

  Yep, AI Control Tower gives enterprises a single place to see, manage, govern, and optimize AI across the entire business. And it works with any AI, not just theirs. Every device on your network, every permission across every system, every AI agent, visible and secure in one place.

• 57:48Ben Gilbert?

  And ServiceNow can do this because they've spent more than 20 years building the operational backbone of the enterprise, the workflows, governance, approvals, security controls, and institutional knowledge that power how work actually gets done across IT, HR, customer service, finance, and security.

• 58:04David Rosenthal?

  ServiceNow already runs more than 100 billion workflows annually and trillions of transactions for more than 85% of the Fortune 500. So when companies need a place to govern AI at enterprise scale, they're building on a platform at the center of how their business already operates.

• 58:21Ben Gilbert?

  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?

• 58:30David Rosenthal?

  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/acquired and tell them that Ben and David sent you.

• 58:41Ben Gilbert?

  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 into Lockheed Martin. So where are we going?

• 59:05David Rosenthal?

  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.

• 59:37Ben Gilbert?

  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.

• 1:00:01David Rosenthal?

  Incredible.

• 1:00:02Ben Gilbert?

  This stuff is buried.

• 1:00:04David Rosenthal?

  I honestly can't believe it. And I'm so glad that we get to tell it here.

• 1:00:09David Rosenthal?

  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,

• 1:00:54David Rosenthal?

  where was all of the US and allied radar work and research being done? It was primarily being done out of two institutions in Boston, MIT with the Radiation Laboratory, or the RAD Lab, and Harvard with the Harvard Radio Research Laboratory. Now, here's what's interesting. Neither of these two labs at MIT and Harvard existed before the war. The government directed MIT and Harvard to set them up as part of the war effort. They didn't exist before, and then MIT and Harvard, very fortunately for California and Silicon Valley, shut them down after the war.

• 1:01:36David Rosenthal?

  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.

• 1:02:09Ben Gilbert?

  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.

• 1:02:19David Rosenthal?

  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.

• 1:02:54Ben Gilbert?

  And he gives them tenure immediately.

• 1:02:57David Rosenthal?

  Yes.

• 1:02:58Ben Gilbert?

  He's like, I want to make this deal as sweet as possible for you because I want to will Stanford into existence as an engineering institution.

• 1:03:06David Rosenthal?

  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.

• 1:03:27Ben Gilbert?

  They're notoriously friendly.

• 1:03:28David Rosenthal?

  Yes, notoriously friendly and everywhere else, including Harvard, MIT, Princeton, blah, blah, blah, notoriously unfriendly and hard to work with.

• 1:03:36Ben Gilbert?

  The classic story is Stanford owned 1% of Google at spin out, which ended up making them an ungodly amount of money because of how big Google became. And if that were at other universities, they would have said 50% 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.

• 1:03:54David Rosenthal?

  Now, I sort of in the back of my mind knew this because I had watched Steve Blank's talk many years ago, but I kind of forgotten. I just thought it was like, oh, well, that's because Stanford and Silicon Valley, like, we get it. We're smart. Not that we're smarter, but there's this attitude of, you know, if you're in Silicon Valley, even to this day, you're like, yeah, we get how the culture works here. And like the East Coast doesn't get it.

• 1:04:14Ben Gilbert?

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

• 1:04:20David Rosenthal?

  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 like in the nation's service.

• 1:04:53Ben Gilbert?

  Take the research and the people who are doing the research out, start a brand new company. He would try to help you find funding, which at that point venture capital didn't exist. So he was introducing you to customers who could sort of preorder from you to fund your research. And he basically believed that a commercial ecosystem leads to more innovation than one that is purely happening in academia. And thus could better serve the needs of the nation.

• 1:05:21David Rosenthal?

  Customers.

• 1:05:22Ben Gilbert?

  Customer.

• 1:05:23David Rosenthal?

  Customer. Hang on to that thought for one second.

• 1:05:26Ben Gilbert?

  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.

• 1:05:34David Rosenthal?

  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 Terrence'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.

• 1:06:04Ben Gilbert?

  And like 80% of the land is still undeveloped.

• 1:06:06David Rosenthal?

  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 PARC was. It's where Next was and Steve Jobs.

• 1:06:49David Rosenthal?

  It's where Facebook's office was for a while. This is where Theranos was. My God. So you might be like, listening like, well, this is cool. Maybe I knew this stuff. Maybe I didn't. This is really fun Silicon Valley history. What does this have to do with Lockheed? Well, one of the very first tenants of Stanford Industrial Park, 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,

• 1:07:35David Rosenthal?

  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.

• 1:07:57Ben Gilbert?

  There are a lot of Skunk Works devotees, David. That is quite the assertion to say that this is a bigger deal.

• 1:08:03David Rosenthal?

  Well, let's talk about it. Listeners, you can judge. They patterned themselves after Skunk Works and took so many of the Skunk Works management principles up to Silicon Valley. I was reading Skunk Works. I'm like, oh, yeah, so many of these principles. They sound like Silicon Valley principles. Well, there's a reason for that. 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.

• 1:08:44Ben Gilbert?

  And so it starts in Southern California.

• 1:08:46David Rosenthal?

  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.

• 1:09:28David Rosenthal?

  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.

• 1:09:41Ben Gilbert?

  Hmm.

• 1:09:42David Rosenthal?

  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.

• 1:10:00Ben Gilbert?

  Ah, interesting. And this is cool. This is a part of the research that you did that I don't know much about.

• 1:10:05David Rosenthal?

  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.

• 1:10:20Ben Gilbert?

  Huh.

• 1:10:20David Rosenthal?

  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.

• 1:10:38Ben Gilbert?

  Wow.

• 1:10:39David Rosenthal?

  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.

• 1:11:07Ben Gilbert?

  What?

• 1:11:08David Rosenthal?

  Lockheed built Sunnyvale.

• 1:11:11Ben Gilbert?

  I didn't realize that. Wow. So how many people would eventually work in Sunnyvale at Lockheed?

• 1:11:18David Rosenthal?

  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 as Silicon Valley today, like Yahoo, Intel and all that.

• 1:11:48Ben Gilbert?

  Cisco.

• 1:11:49David Rosenthal?

  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 Termon, and Fred encouraged them to spin out and start Hewlett Packard. They were the largest new tech company. They only had 3,000 people, 1, 2, 3. Lockheed had 30,000 people.

• 1:12:14Ben Gilbert?

  Whoa. Oh, my God. 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.

• 1:12:38David Rosenthal?

  Yeah, they had this huge structure called the Blue Cube that has since been disassembled. It's not there anymore. But you know, you need a like big hangar that you're going to build missiles in. And they end up building a lot more than missiles we're going to talk about.

• 1:12:51Ben Gilbert?

  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.

• 1:13:03David Rosenthal?

  The same time as Lockheed is coming to Silicon Valley.

• 1:13:06Ben Gilbert?

  Right. And of course, Shockley is a predecessor to Fairchild Semiconductor, which is a predecessor to Intel. So like, they've got Termon'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.

• 1:13:25David Rosenthal?

  So we talked about this a bunch, actually, on the first Sequoia Capital episode when we were telling Don Valentine's story. And at the time, when we were telling the story, we're like, oh, you know, Don, he was so legendary before he started Sequoia. He was the head of sales at Fairchild Semiconductor and the head of sales at National Semiconductor. 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?

• 1:13:53Ben Gilbert?

  I mean, he was selling to defense company.

• 1:13:56David Rosenthal?

  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.

• 1:14:07Ben Gilbert?

  Wow.

• 1:14:08David Rosenthal?

  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.

• 1:14:20Ben Gilbert?

  I can't believe that there were 10 times more employees at Lockheed in Silicon Valley than at HP in the late 50s.

• 1:14:31David Rosenthal?

  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.

• 1:15:03Ben Gilbert?

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

• 1:15:08David Rosenthal?

  No Apple. Crazy.

• 1:15:11Ben Gilbert?

  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 Taccal train between them.

• 1:15:54David Rosenthal?

  Yeah, that's a recent phenomenon.

• 1:15:55Ben Gilbert?

  San Francisco is a completely different universe at this point that is in zero part responsible for the growth of Silicon Valley.

• 1:16:03David Rosenthal?

  Yeah, and before this time, before the 50s, there was no silicon. It was called the Valley of Hearts Delight. That was the name for it. It wasn't Silicon Valley.

• 1:16:12Ben Gilbert?

  Huh. Wild.

• 1:16:14David Rosenthal?

  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?

• 1:16:57David Rosenthal?

  One went up to space, as perhaps is obvious and we foreshadowed and literally is in the name of the company, the Lockheed Missiles and Space Corporation. And the other one went down under the oceans. So let's talk about that one first, because I think it happened first chronologically. So submarines had obviously been a thing since World War 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.

• 1:17:41David Rosenthal?

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

• 1:17:48David Rosenthal?

  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.

• 1:18:08David Rosenthal?

  Unless somebody could maybe somehow figure out a way to fire an intercontinental ballistic missile out of a submarine and go up into, you know, the air and into space and then hit a land-based target far, far away. Now, this seems crazy. It's hard enough to make this happen from the ground. You're talking about doing this from the sea with all the like waves and the lack of stability. No way this could happen.

• 1:18:35Ben Gilbert?

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

• 1:18:39David Rosenthal?

  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, its FBM, the idea is they're going to fire these things from the surface of the ocean. The submarine's going to rise up and they're going to like stabilize it in water and then they're going to fire off a missile from the deck of a ship or a surface submarine.

• 1:19:05Ben Gilbert?

  You could imagine another issue, which is these things have rockets on them. So you have to not destroy the launch pad, which is the submarine full of American humans while launching it.

• 1:19:16David Rosenthal?

  Yeah, this is a big challenge. The reason that it was worth trying was that if you could create a naval-based intercontinental nuclear strike capability, it completely changes the strategic landscape of deterrence and first strike versus second strike and retaliation. So what we were really afraid of, we thought the Soviets would pursue a first-strike policy if they felt they were able to. The way that they would do that is if they felt that they could, in that first strike, knock out all of our nuclear capabilities.

• 1:19:57David Rosenthal?

  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.

• 1:20:18Ben Gilbert?

  It's quite the deterrent.

• 1:20:19David Rosenthal?

  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

• 1:21:04David Rosenthal?

  October 1957, even though Sputnik itself was far from having nuclear ICBM capabilities, the Soviets getting to space first was truly terrifying.

• 1:21:15Ben Gilbert?

  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.

• 1:21:29David Rosenthal?

  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 US nuclear ballistic missile-equipped submarine sets sail on its

• 1:22:14David Rosenthal?

  patrol, and everything we just talked about is operationalized. Equipped with Lockheed, Polaris A1, 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.

• 1:22:38Ben Gilbert?

  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.

• 1:22:50David Rosenthal?

  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.

• 1:23:00Ben Gilbert?

  Oh, yeah. Bezos's dad worked there, right?

• 1:23:02David Rosenthal?

  Grandfather. Bezos's grandfather was the head of Sandia, which was in New Mexico, the military nuclear program, the division of the US overall nuclear program, I think, was out of Los Alamos. But Sandia was the military arm of it.

• 1:23:18Ben Gilbert?

  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.

• 1:23:31David Rosenthal?

  Yep. To enable this strategic chess piece, the key thing is the missiles. Nuclear submarines already existed. Nuclear warheads already existed. The challenge here was create a system by which you could launch a missile from under the ocean out of a submarine.

• 1:23:47Ben Gilbert?

  Man, I just gotta say, it is so fortunate and insane to me that neither side ever launched. All the deterrence, for all the scary things that could have come out of it and all the itchy trigger fingers and everybody getting close, it never happened. That is a big applause to humanity that we could have done this and no one did.

• 1:24:09David Rosenthal?

  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.

• 1:24:37Ben Gilbert?

  Yeah, it's crazy. Okay, so Lockheed, after four years successfully, does the underwater ICBM launch.

• 1:24:45David Rosenthal?

  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.

• 1:25:08Ben Gilbert?

  Terrifying.

• 1:25:09David Rosenthal?

  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 US, starting in the 1960s, had nuclear submarines carrying intercontinental ballistic missiles.

• 1:25:40Ben Gilbert?

  Yep.

• 1:25:40David Rosenthal?

  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.

• 1:25:52Ben Gilbert?

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

• 1:25:56David Rosenthal?

  Right. Maybe it wasn't. Who knows?

• 1:25:57Ben Gilbert?

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

• 1:26:01David Rosenthal?

  Maybe it's all the cover. Maybe all the money that went into Silicon Valley. No, I don't think that was the case. Either way, you don't want to find out.

• 1:26:09Ben Gilbert?

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

• 1:26:14David Rosenthal?

  Oh, yes. And Disney was involved.

• 1:26:17Ben Gilbert?

  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 too, built basically these burlap cities on top of factories that looked like suburbs, complete with 3D cars and trees and stuff, so that anybody who was creating a spy plane and flying overhead would mistake our manufacturing facilities for something innocuous.

• 1:26:44David Rosenthal?

  Yeah, I think it was spy planes and also during World War II bombers, if bombers ever made it to the West Coast, that they wouldn't know where to bomb. And I'm pretty sure that Disney Imagineering was involved in creating these sets like they made for Disneyland.

• 1:26:58Ben Gilbert?

  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.

• 1:27:09David Rosenthal?

  Super interesting. Okay, so if you remember back when we pressed pause on the Skunk Works 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 US observational capabilities in the Soviet Union and that it was for about three months, but nobody knew it. Well, LMSC is the reason that we got our eyes back in the sky.

• 1:27:45Ben Gilbert?

  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.

• 1:28:01David Rosenthal?

  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 and space.

• 1:28:29Ben Gilbert?

  Whoa. All right, I'm listening.

• 1:28:31David Rosenthal?

  Okay.

• 1:28:31Ben Gilbert?

  You got a lot of hairs on my arms.

• 1:28:33David Rosenthal?

  Yeah, yeah, yeah, I know.

• 1:28:34Ben Gilbert?

  I'm getting mad over here.

• 1:28:35David Rosenthal?

  People are probably getting very mad. Here we go. So when you think about America in space and the US space program, you think, of course, about NASA.

• 1:28:46Ben Gilbert?

  Gemini and Apollo.

• 1:28:47David Rosenthal?

  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 vessel. It was like the size of, I don't know, like a bowling ball. Or so I think it was a little bigger, but like, it was very, very simple. It was a long, long, long, long time before you went from

• 1:29:32David Rosenthal?

  those initial science missions to applications in space. Or so everybody thought. Because in parallel, there was a secret US space program being run by Lockheed Missiles and Space Corporation out of Silicon Valley. And in basically the same timeframe as the initial NASA missions, the initial Mercury, I think, were the first missions.

• 1:30:01Ben Gilbert?

  Mercury, Gemini, Apollo. Yep.

• 1:30:02David Rosenthal?

  Yeah. Basically concurrently with that, they got a fully operational observational spy satellite system up into space and functioning at the same time.

• 1:30:15Ben Gilbert?

  How did we launch them with nobody laid out?

• 1:30:19David Rosenthal?

  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.

• 1:30:57Ben Gilbert?

  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.

• 1:31:05David Rosenthal?

  Yeah.

• 1:31:06Ben Gilbert?

  It's literally the document that was prepared in secret and then declassified.

• 1:31:10David Rosenthal?

  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.

• 1:31:25Ben Gilbert?

  Wow.

• 1:31:25David Rosenthal?

  Just amazing.

• 1:31:27Ben Gilbert?

  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.

• 1:31:44David Rosenthal?

  Ah, 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, 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

• 1:32:26David Rosenthal?

  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.

• 1:33:11Ben Gilbert?

  Right.

• 1:33:13David Rosenthal?

  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.

• 1:33:37Ben Gilbert?

  Wow.

• 1:33:37David Rosenthal?

  No need to fly a plane, no need to worry about getting caught, no need to worry about the Soviets knowing what was going on, no need to worry about being shot down. Unbelievable.

• 1:33:47Ben Gilbert?

  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.

• 1:33:56David Rosenthal?

  Now, you might be thinking as you're listening, you know, you're, 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 gotta get the film down from space is my point.

• 1:34:20Ben Gilbert?

  Which they literally did.

• 1:34:22David Rosenthal?

  And how did they do it? They dropped it.

• 1:34:25Ben Gilbert?

  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.

• 1:34:45David Rosenthal?

  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.

• 1:34:57Ben Gilbert?

  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.

• 1:35:04David Rosenthal?

  Yes.

• 1:35:04Ben Gilbert?

  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.

• 1:35:32David Rosenthal?

  This is my favorite part. This is so good.

• 1:35:35Ben Gilbert?

  Coming down with a parachute. The capsule is designed to be caught

• 1:35:40David Rosenthal?

  Yes.

• 1:35:41Ben Gilbert?

  in midair

• 1:35:42David Rosenthal?

  Yes.

• 1:35:42Ben Gilbert?

  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.

• 1:35:55David Rosenthal?

  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.

• 1:36:04Ben Gilbert?

  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.

• 1:36:38David Rosenthal?

  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.

• 1:36:46Ben Gilbert?

  Right? The whole thing is genius, crazy, and absolutely insane that it actually worked.

• 1:36:54David Rosenthal?

  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 re-enter the atmosphere.

• 1:37:02Ben Gilbert?

  You would 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.

• 1:37:15David Rosenthal?

  And all this happened in 1960. Oh, my God. So all told, the Corona satellite program and LMSC also designed the Agina rocket, which was the kind of upper-stage rocket booster that the Corona satellite and other satellites, future satellites, attached to.

• 1:37:33Ben Gilbert?

  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.

• 1:37:43David Rosenthal?

  So that system of the Corona and the Agina 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.

• 1:38:17Ben Gilbert?

  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.

• 1:38:28David Rosenthal?

  I mean, any one of those things that I just mentioned, if this weren't a top-secret, black, classified program for, what, three and a half decades, we'd be all over the history books. And as is, like, nobody knows about this stuff.

• 1:38:41Ben Gilbert?

  Yeah. It's the first, obviously, mapping of Earth from space. It's the first stereo-optical data from space. It's the first reconnaissance program to fly a hundred missions at all, let alone one in space. I mean, this thing operated for 12 years.

• 1:38:57David Rosenthal?

  Yeah, crazy. So Corona would then lead to three follow-up programs that we know of. I'm sure many, many more. But there are three follow-on ones that LMSC did that have been declassified so far. Some of these only very recently. So the strategy of the program evolution over time followed the four stages that we know of. First, it was what they called "see it." That was Corona, just period. Can we see the Soviet Union from space? Corona proved that. The next phase was can we see it well? And then the phase after that was can we see it all? And then the last phase, which is a lot of the last phase is still classified is see it now. So let's talk about all of these.

• 1:39:42David Rosenthal?

  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.

• 1:40:27David Rosenthal?

  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.

• 1:40:57Ben Gilbert?

  You basically would need larger format film with a wider angle lens. If you don't want to increase your number of satellites.

• 1:41:05David Rosenthal?

  Yeah, I'm fuzziest on Hexagon. Then in 1977, they launch Kennen, K E N N E N, which this is still like very classified. Some of it is out, so I can, we can know a little bit about this. There actually was an incident in, I think it was 2019 when Trump was president. He tweeted a No. 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 like. And people went nuts. People believe it's never been confirmed that this photo was from a future version of the Kennen program. Huh.

• 1:41:49David Rosenthal?

  So what was Kennen? Kennen was see it now.

• 1:41:54David Rosenthal?

  It's the first realtime space-based surveillance system. I guess maybe the first realtime 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 Kennon satellites are like what we think about like Google Maps. Like it's realtime digital photography beamed down via ground link to stations in realtime.

• 1:42:23Ben Gilbert?

  Whoa.

• 1:42:25David Rosenthal?

  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.

• 1:42:43Ben Gilbert?

  I didn't know about any of this.

• 1:42:44David Rosenthal?

  Yeah, Lockheed built all this in Silicon Valley.

• 1:42:47Ben Gilbert?

  Wow. By the way, you keep saying Google Maps. There's a fun piece of trivia that I'm curious if you know.

• 1:42:52David Rosenthal?

  Ooh.

• 1:42:53Ben Gilbert?

  Do you know, I think it was the code name, the original name for the Corona program?

• 1:42:58David Rosenthal?

  Oh, Keyhole, yes.

• 1:43:00Ben Gilbert?

  Yes.

• 1:43:00David Rosenthal?

  Which is one of the companies that Google acquired that became Google Maps.

• 1:43:04Ben Gilbert?

  Yep.

• 1:43:05David Rosenthal?

  Different Keyhole.

• 1:43:06Ben Gilbert?

  Different Keyhole, but I'm pretty sure Keyhole Inc., which became Google Maps, was named after this Keyhole program.

• 1:43:13David Rosenthal?

  Ooh, it very well could have been because it was 1995 when that was declassified. And I'm sure Keyhole was started after that.

• 1:43:20Ben Gilbert?

  Yep.

• 1:43:21David Rosenthal?

  Just super cool. Along the way, LMSC also does a lot of pioneering work in weather satellites. And they launched weather satellites because it turns out that most of Russia is under cloud cover most of the time. So they gotta know when, you know, the weather is going to be clear enough to look pretty awesome.

• 1:43:38Ben Gilbert?

  Well, that's when you get into like all the synthetic aperture radar and all the other types of sensing that you have in satellites now that are not just the visible light spectrum in order to get visibility of stuff on the ground, no matter the conditions.

• 1:43:52David Rosenthal?

  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.

• 1:44:11Ben Gilbert?

  Wow.

• 1:44:12David Rosenthal?

  Yeah, one thing that we have a lot of idea about that they built that I had no idea till researching all this. So, you know, we're now in the seventies as this is going along and we'll come back and talk a little bit about this as we come back to Skunkworks here in a sec, but we're getting towards the end of the Cold War and this stuff is less urgent. Lockheed and LMSC start moving into non-military applications or trying to, but LMSC gets a contract from NASA and builds the Hubble telescope. Did you know that?

• 1:44:47Ben Gilbert?

  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.

• 1:44:59David Rosenthal?

  Haha, that's so awesome. Different companies at the time, now the same company.

• 1:45:04Ben Gilbert?

  Yep. All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, Logora, the agentic operating system that is redefining how the world's best legal teams work.

• 1:45:18David Rosenthal?

  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. Logora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 1:45:34Ben Gilbert?

  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.

• 1:45:49David Rosenthal?

  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. Legora'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.

• 1:46:13Ben Gilbert?

  And they recently launched Legora 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.

• 1:46:32David Rosenthal?

  And Legora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Legora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Legora 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.

• 1:47:02Ben Gilbert?

  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 legora.com/acquired and just tell them that Ben and David sent you.

• 1:47:27David Rosenthal?

  Okay. Two other things that I want to talk about with LMSC before we come back to the Coda on Skunkworks and the Blackbird and all that. One, I think I alluded to this earlier. LMSC, listeners, you be the judge. The stories that we've just told, is this more impactful to America and the world than what Skunk Works was doing? Personally, I kind of think yes, but you know, maybe you can debate. What is undebatable is that LMSC, from a business standpoint within Lockheed, became the crown jewel of the company.

• 1:48:02Ben Gilbert?

  Huh. Which isn't true anymore, or at least it's not their largest business today.

• 1:48:07David Rosenthal?

  Well, I think at times, in the 60s and 70s and 80s, LMSC was the largest business by revenue. But almost through the whole time, it was by far the most profitable division within Lockheed. And at times, when we'll get into, Lockheed fell on some really hard times in the 70s. There were years where LMSC generated more than 100% of the profits of Lockheed. So all of the rest of Lockheed, Skunk Works included, was in the red, unprofitable, bleeding money, and LMSC was keeping the company afloat.

• 1:48:44Ben Gilbert?

  Wow.

• 1:48:45David Rosenthal?

  And if you think about it, I guess, one, like, just what they're developing and the scale of it, and these contracts are huge, both under the ocean and up in space. 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

• 1:49:30David Rosenthal?

  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,

• 1:50:10David Rosenthal?

  LMSC accounted for 46% of revenue, so growing percentage of revenue, and 72% of profits during that 10-year period.

• 1:50:19Ben Gilbert?

  Wow, it really is a completely different company today. And I want to save why as we drift toward today and analysis and all that. But that's crazy how big the LMSC business was at the time.

• 1:50:30David Rosenthal?

  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 tenant number one.

• 1:51:15David Rosenthal?

  And that one is focus on a threat-based need. And I think that's really interesting. Huh. To me, when I read that and thought about it, that element is missing from Skunk Works and Kelly's philosophy. Oh, this is conjecture here, like, there's no Skunk Works book about LMSC. So like, we have very little information to go on. But if that really was tenant number one for the company.

• 1:51:45David Rosenthal?

  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.

• 1:52:15Ben Gilbert?

  Or so they thought. I mean, if they knew about this robust spy satellite system.

• 1:52:21David Rosenthal?

  Well, this is the argument. Maybe it wasn't that important. Maybe the Blackbird was a decoy.

• 1:52:26Ben Gilbert?

  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.

• 1:52:35David Rosenthal?

  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.

• 1:52:43Ben Gilbert?

  My computer wallpaper needs to exist, so that's a need.

• 1:52:46David Rosenthal?

  There was a market need. Was there a threat-based need? Okay. So, Skunk Works, the greatest airplane ever built.

• 1:52:55Ben Gilbert?

  Gee, it sure would be nice if we had a plane that couldn't be shot down.

• 1:53:00David Rosenthal?

  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.

• 1:53:37Ben Gilbert?

  70,000 feet.

• 1:53:38David Rosenthal?

  Yep. It's not like you could evade enemy fighters or missiles in this thing. It had 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.

• 1:53:52Ben Gilbert?

  So it's not very fast and it doesn't fly high enough to evade missiles. So kind of useless.

• 1:53:59David Rosenthal?

  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 U2 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.

• 1:54:23Ben Gilbert?

  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.

• 1:54:34David Rosenthal?

  Yep. So, uh, that's the path they took.

• 1:54:37Ben Gilbert?

  If you can evade them, outrun them.

• 1:54:39David Rosenthal?

  Yep. It's like the Sonic the Hedgehog of airplanes. So this program, if you know anything about the SR71 Blackbird, you're like, well, that's a Air Force airplane. We're talking about the CIA here. The Blackbird was not a CIA airplane. The program that the Blackbird ultimately came out of was the A12 OX cart. This was essentially the same airplane. We'll talk about the differences in a minute. But this was the CIA contract that they had 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.

• 1:55:15Ben Gilbert?

  It has an even better camera, I think, also designed by Edwin Land. And it can get these incredible photos flying really, really fast.

• 1:55:24David Rosenthal?

  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.

• 1:55:37David Rosenthal?

  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.

• 1:55:48Ben Gilbert?

  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 SR71 flies over your head, the SR71 will beat the bullet.

• 1:56:00David Rosenthal?

  Yeah, it goes about two thirds of a mile every second.

• 1:56:04Ben Gilbert?

  This thing also is not very good at turning, as you would imagine. So there's a fun stat about the SR71. 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.

• 1:56:24David Rosenthal?

  Oh, wow.

• 1:56:25Ben Gilbert?

  Its decommissioning mission, just to show off how fast it ever went, was one hour and five minutes from LA to DC.

• 1:56:35David Rosenthal?

  For being placed in the National Air and Space Museum.

• 1:56:38Ben Gilbert?

  Yep. Coast to coast in an hour.

• 1:56:41David Rosenthal?

  Wow. And I remember being a kid and looking at this thing like, well, why didn't we commercialize it? Like, you can't commercialize this thing. You've got to be in a spacesuit to fly this.

• 1:56:50Ben Gilbert?

  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, Arturo Dito style, looking like an astromech from Star Wars, to navigate by the stars.

• 1:57:26David Rosenthal?

  So great.

• 1:57:27Ben Gilbert?

  I mean, it is like 50 concurrent miracles that went into making this thing possible.

• 1:57:32David Rosenthal?

  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, LMS-C, 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.

• 1:57:49Ben Gilbert?

  And these aren't rocket engines. These are jet engines that they figured out how to make go Mach 3.

• 1:57:53David Rosenthal?

  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.

• 1:58:36David Rosenthal?

  So the idea that you were gonna achieve cruising speeds, like sustained speeds above Mach 3, this is a big piece to bite off here. Only a handful of planes have ever been able to do this since, and I'm pretty sure no other plane has been able to do this at cruise speed without engaging afterburners.

• 1:58:57Ben Gilbert?

  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.

• 1:59:06David Rosenthal?

  Yes. Okay, so how are you gonna do this? The only way you can do this in a jet-powered plane is to essentially design something that can run with afterburners on all the time. Like, they're not afterburners, they're just burners. It's how the thing goes. To do that, you A. required a tremendous amount of fuel, and B. you also produce heat in doing so that's like rocket-level proportions.

• 1:59:36Ben Gilbert?

  The skin of the airplane gets to 500 degrees Fahrenheit. The area near the engines on the airframe itself gets almost to 1,000.

• 1:59:46David Rosenthal?

  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.

• 1:59:56Ben Gilbert?

  Which was a metal that no one had ever built a plane out of before.

• 1:59:59David Rosenthal?

  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.

• 2:00:07Ben Gilbert?

  There happened to be mines somewhere else with a bunch of titanium.

• 2:00:10David Rosenthal?

  So the government and Lockheed set up a bunch of dummy corporations.

• 2:00:14Ben Gilbert?

  In Europe, like European Incorporated dummy corporations.

• 2:00:18David Rosenthal?

  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.

• 2:00:29David Rosenthal?

  Too funny.

• 2:00:30Ben Gilbert?

  And by the way, you can't machine titanium with regular tools.

• 2:00:35David Rosenthal?

  Right.

• 2:00:36Ben Gilbert?

  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.

• 2:00:48David Rosenthal?

  I feel like it's like a diamond cutting facility or something.

• 2:00:51Ben Gilbert?

  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.

• 2:01:04David Rosenthal?

  Amazing.

• 2:01:05Ben Gilbert?

  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.

• 2:01:41David Rosenthal?

  Ben, are you telling me that the Blackbird had panel gaps?

• 2:01:44Ben Gilbert?

  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.

• 2:02:01David Rosenthal?

  And you needed a lot of fuel in there.

• 2:02:03Ben Gilbert?

  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.

• 2:02:29David Rosenthal?

  Oh, my God. This is one of the reasons why it is maybe spoiling it a little bit. But to flash forward, the Air Force hated operating these things.

• 2:02:38Ben Gilbert?

  Yeah.

• 2:02:39David Rosenthal?

  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.

• 2:02:50Ben Gilbert?

  Yep.

• 2:02:51David Rosenthal?

  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.

• 2:03:13Ben Gilbert?

  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.

• 2:03:21David Rosenthal?

  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 at Skunk Works, they could only produce about 25% of the thrust required. So Ben leads a team that engineers the spike inlet system. So if you're looking at a Blackbird and you look at the engines, they've got these cones in front, these spikes, these big spikes. I mean, I'm sure everybody listening has seen a photo of Blackbird.

• 2:03:58Ben Gilbert?

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

• 2:04:03David Rosenthal?

  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.

• 2:04:10Ben Gilbert?

  But these cones, what do they do?

• 2:04:12David Rosenthal?

  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 3/4 of the thrust needed to get to Mach 3-plus and sustain it. Unbelievable.

• 2:04:51Ben Gilbert?

  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.

• 2:05:01David Rosenthal?

  You couldn't shoot bullets out of it because it's faster than the bullets.

• 2:05:04Ben Gilbert?

  Right. But they did consider, I think Kelly and the Skunk Works team were really advocating to build a tactical aircraft that was based on this, or a bomber, and that never happened. So every version of the SR-71, or their early prototypes of the Archangel, or the CIA spy plane, they're only ever badass airplanes that carry cameras.

• 2:05:25David Rosenthal?

  And go really fast.

• 2:05:26Ben Gilbert?

  Yeah.

• 2:05:28David Rosenthal?

  Yeah. So fortunately, you know, Skunk Works and the CIA had started working on the A-12 OX cart before Gary Powers was shut down. It takes, I believe, quite a while to engineer this beast. They start test flying it in April 1962, of course, at Area 51. Where else are they going to do this? Once they start test flying it, that's when the Air Force finally gets interested in the project and is like, oh, we want our version of this. And that's how the Blackbird comes about. A fun little bit of trivia, within the Air Force and the Pentagon, the project originally was called the RS-71.

• 2:06:07Ben Gilbert?

  Yes.

• 2:06:08David Rosenthal?

  Not the SR.

• 2:06:09Ben Gilbert?

  And the SR-71 is Strategic Reconnaissance, but it ended up being backwards.

• 2:06:13David Rosenthal?

  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.

• 2:06:56Ben Gilbert?

  Yeah.

• 2:06:57David Rosenthal?

  So, the first official flight of the Blackbird happens on December 22, 1964. It reaches a top speed of Mach 3.4.

• 2:07:06Ben Gilbert?

  God.

• 2:07:07David Rosenthal?

  The airplane wins Kelly his second Collier Trophy. I mean, still, to this day, people lose their minds over this thing, and it's stunning.

• 2:07:15Ben Gilbert?

  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.

• 2:07:39David Rosenthal?

  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.

• 2:07:50Ben Gilbert?

  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.

• 2:08:00David Rosenthal?

  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.

• 2:08:10Ben Gilbert?

  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.

• 2:08:19David Rosenthal?

  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

• 2:09:03David Rosenthal?

  was everything, it's more of a niche use case here.

• 2:09:07Ben Gilbert?

  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.

• 2:09:32David Rosenthal?

  Yeah, wild, right?

• 2:09:34Ben Gilbert?

  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 aerodynamics stuff about it. Of course, there's also it's the first stealth airplane. I mean, that's the other thing that we didn't talk about is the reason this thing wasn't detected on radar for four years because they figured out how to fly and start to evade radar.

• 2:10:13David Rosenthal?

  Yep. 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.

• 2:10:24Ben Gilbert?

  It's not that, I don't think. It's more around the shape because radar will just go unimpeded, you know, out into space. There's famous stories about detecting where people's radar transmitters are by bouncing them off the moon and figuring out the patterns of bouncing off the moon. It's more, I think, that the SR71'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

• 2:11:08Ben Gilbert?

  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 coating 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.

• 2:11:42David Rosenthal?

  Ah, that's cool.

• 2:11:44Ben Gilbert?

  They also did a whole bunch of work around making the rivets exactly flush with the skin. So it basically didn't have a whole bunch of rounded parts that could risk bouncing radar waves back at the transmitter receiver.

• 2:11:57David Rosenthal?

  Super cool. Keep in mind for a minute from now, that idea of flat surfaces and planes and radar, planes, not airplanes, planes like a flat plane and surfaces. Okay. To close out on this amazing airplane, amazing and sad in a lot of ways, it's hugely expensive to build these things. $33 million per plane, which was a lot back then. I mean, planes now cost more, but a lot. And then, as I said, $300 million a year just to keep them operational and run the program. You couldn't use it as a fighter or a bomber. It was only reconnaissance. It's not super popular with the military and the air force. They kind of don't like it as an operational plane.

• 2:12:39Ben Gilbert?

  Right. It's a lusty airplane.

• 2:12:41David Rosenthal?

  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.

• 2:13:00Ben Gilbert?

  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.

• 2:13:11David Rosenthal?

  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. 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.

• 2:13:47Ben Gilbert?

  And it is still, they call it out in their earnings like today. They're still selling F-16s today.

• 2:13:52David Rosenthal?

  So here's what's interesting about this contract and Lockheed and Skunk Works losing it. This is an example, I think, of to that first tenant from LMSE 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

• 2:14:35David Rosenthal?

  Force what they didn't want and they lost it. Like the idea of Skunk Works losing a contract, this is crazy.

• 2:14:41Ben Gilbert?

  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.

• 2:15:13David Rosenthal?

  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.

• 2:15:32Ben Gilbert?

  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.

• 2:15:55David Rosenthal?

  Yeah, totally. And this is not a challenge that LMSC, at least with the Corona project, had to face because nobody knew about it.

• 2:16:02Ben Gilbert?

  Right.

• 2:16:03David Rosenthal?

  So this is a really bad time for Lockheed. This is the period, like we were talking about at the end of the LMSE chapter, where it's LMSE that keeps the company afloat. Kelly retires. Kelly retires, Ben Rich takes over as head of Skunk Works. Skunk Works is doing layoffs. 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,

• 2:16:47David Rosenthal?

  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. Yeah. At the same time, Lockheed also gets caught up in really nasty bribery scandals around the world. But these are nasty political scandals themselves. And basically Lockheed comes out looking, at least to the American public, like kind of a corrupt arms dealer.

• 2:17:30David Rosenthal?

  So what happens is Lockheed, and lots of people would argue that this is just the way you needed to do business in foreign countries, our allies that Lockheed sold these weapons to, in the Netherlands, in Japan, and in Saudi Arabia. It comes to light that Lockheed employees and contractors are paying bribes to political officials to win contracts. This actually brings down the Japanese prime minister at the time. Whoa. This is a huge scandal in Japan, on the order of like Watergate in the US. Huge scandal. Sega actually makes an arcade game about it called I'm Sorry about the Prime Minister at the time, like so funny.

• 2:18:11David Rosenthal?

  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. Lockheed's finances at the same time are so bad, they need a bailout from the government.

• 2:18:53David Rosenthal?

  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.

• 2:19:08Ben Gilbert?

  Hmm. I didn't realize how dark it got there.

• 2:19:11David Rosenthal?

  It got real, real dark. And again, it was only the profits from LMSC that kept the company from probably going under.

• 2:19:18Ben Gilbert?

  Hmm.

• 2:19:19David Rosenthal?

  So, okay, we've mentioned stealth a few times here. Back to Skunk Works.

• 2:19:23Ben Gilbert?

  There is one more great Skunk Works airplane, and it is under the administration of Ben Rich, Kelly's successor.

• 2:19:30David Rosenthal?

  One last hurrah, at least for the traditional Skunk Works organization.

• 2:19:35Ben Gilbert?

  So there's a math paper published in a Russian journal.

• 2:19:41David Rosenthal?

  Around mid-1970s, right around this time.

• 2:19:43Ben Gilbert?

  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.

• 2:20:25Ben Gilbert?

  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.

• 2:20:35David Rosenthal?

  Or a ball bearing, famously.

• 2:20:37Ben Gilbert?

  Or a ball bearing.

• 2:20:38David Rosenthal?

  So that Skunk Works employee was then 36-year-old Dennis Overholzer, who was a mathematician, and he, like you said, reads this paper and brings it to Ben Rich, who just six months earlier had taken over from Kelly as head of Skunk Works.

• 2:20:56Ben Gilbert?

  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.

• 2:21:13David Rosenthal?

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

• 2:21:32Ben Gilbert?

  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.

• 2:21:57David Rosenthal?

  He's such an aesthetic snob. He's like, that's not an airplane. We can't make it. It doesn't look beautiful.

• 2:22:03Ben Gilbert?

  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.

• 2:22:14David Rosenthal?

  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?

• 2:22:23Ben Gilbert?

  Yeah.

• 2:22:24David Rosenthal?

  Could you fly this thing?

• 2:22:25Ben Gilbert?

  So what's being proposed here is basically an enormous looking cockpit, this big globular fuselage, and you can Google the F-117A.

• 2:22:38David Rosenthal?

  The name is the Night Hawk.

• 2:22:40Ben Gilbert?

  Stubby wings, these two little, super thin, tall tail fins. It looks super unstable and the whole thing has basically zero round surfaces on it. It's faceted. I mean, it looks like a diamond. In fact, its codename, or I would say probably not its codename, but its nickname internally, was the hopeless diamond.

• 2:23:01David Rosenthal?

  Yes. You know what this thing looks like if you aren't already intimately familiar with images of it? I actually think it looks really cool.

• 2:23:08Ben Gilbert?

  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.

• 2:23:19David Rosenthal?

  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.

• 2:23:41Ben Gilbert?

  These big ass triangles.

• 2:23:43David Rosenthal?

  Big ass triangles. That's what this thing looks like. It literally looks like a, not a Star Fox 64, a Star Fox Super Nintendo plane.

• 2:23:52Ben Gilbert?

  Right. So Ben Rich decides that he wants to put his career on the line.

• 2:23:58David Rosenthal?

  Yeah, and take a risk and make this. So he goes to the Air Force. The Air Force says, "Well, you know, on the one hand, your timing is good. We actually also think stealth technology is worth pursuing. We have an active RFP out there. We didn't come to you guys because Skunk Works hasn't made a fighter plane in god knows how long. You guys just had layoffs. We don't like the Blackbird. Sorry, you guys are old news." And Ben Rich, like you said, he risked his career six months into the job, pursuing it at all. He risks it even further. He goes back to Lockheed corporate and says, "I want to pursue this and make a prototype anyway without a..."

• 2:24:44David Rosenthal?

  Research contract. We're going to fund this internally.

• 2:24:47Ben Gilbert?

  Which this is not something that defense contractors do.

• 2:24:50David Rosenthal?

  No.

• 2:24:51Ben Gilbert?

  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 and 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.

• 2:25:04David Rosenthal?

  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.

• 2:25:16Ben Gilbert?

  The DOD.

• 2:25:16David Rosenthal?

  The DOD is the customer. You know, it's like the Amazon, like, oh, the empty seat for the customer in the room. It's not a metaphorical customer. It is a specific customer.

• 2:25:25Ben Gilbert?

  No, it's like, what does the Pentagon think? Which is a good and a bad. They're unbelievably customer focused. Lockheed Martin doesn't build stuff unless the US government says, I'll order it, which means they don't have to take a lot of risk. But on the other hand, they also don't get the upside from taking risk typically.

• 2:25:42David Rosenthal?

  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 code name 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 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

• 2:26:24David Rosenthal?

  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.

• 2:26:49Ben Gilbert?

  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.

• 2:27:08David Rosenthal?

  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.

• 2:27:47Ben Gilbert?

  Power steering.

• 2:27:48David Rosenthal?

  Exactly. Well, yeah, it's even more than, it's like doing all sorts of stuff that you have no idea.

• 2:27:53Ben Gilbert?

  Right.

• 2:27:54David Rosenthal?

  To make it do what you want to do.

• 2:27:56Ben Gilbert?

  Right. I mean, it's Tesla, basically. It's abstracting away your inputs and doing the thing that is optimal based on what it's pretty sure your inputs want it to do.

• 2:28:04David Rosenthal?

  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.

• 2:28:12Ben Gilbert?

  So I don't blame all these people with the binoculars who are pretty sure there's aliens.

• 2:28:18David Rosenthal?

  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 Lockheed, a time when they desperately needed it and Skunk Works desperately needed it.

• 2:28:41Ben Gilbert?

  Huge win for Ben Rich.

• 2:28:43David Rosenthal?

  Huge win. The real combat debut for the Nighthawk is during the Gulf War, during Operation Desert Storm.

• 2:28:50Ben Gilbert?

  So that's what, six years that they keep it undeployed where they have it, but the US government has decided that we want to save it.

• 2:28:57David Rosenthal?

  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?

• 2:29:13Ben Gilbert?

  I think that's right. I mean, yeah, the F in F-117 is fighter. The SR-71 was not an F plane.

• 2:29:20David Rosenthal?

  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 US Air Force completely knocks out all of Baghdad's defenses and infrastructure. And the way they do it is with the Nighthawks.

• 2:29:53Ben Gilbert?

  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.

• 2:30:14David Rosenthal?

  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

• 2:30:59David Rosenthal?

  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 Bolling, and we punched big holes in all the key Potomac River bridges. And that was just the first night."

• 2:31:15Ben Gilbert?

  So this thing is deadly. The Nighthawk very much worked.

• 2:31:19David Rosenthal?

  The Nighthawk flew 1% of the air missions in Desert Storm, but accounted for 40% of all damaged targets.

• 2:31:26Ben Gilbert?

  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...

• 2:31:45David Rosenthal?

  Yeah, people are dying here.

• 2:31:46Ben Gilbert?

  Yeah.

• 2:31:47David Rosenthal?

  This is the incredible paradox of this. The most overwhelming and terrifying weaponry ever created and weapons capabilities ever created. Was never used and was created so that it would never be used.

• 2:32:04Ben Gilbert?

  Right. It's fascinating.

• 2:32:05David Rosenthal?

  Yeah, totally. But here, this stuff is used and a lot of people died.

• 2:32:09Ben Gilbert?

  For the F-117A, 10,000 people worked on this airplane, the Nighthawk, and kept the secret for 21 years until it was declassified.

• 2:32:18David Rosenthal?

  Wow. Crazy.

• 2:32:20Ben Gilbert?

  Yeah.

• 2:32:20David Rosenthal?

  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.

• 2:32:37Ben Gilbert?

  Yep.

• 2:32:37David Rosenthal?

  There is no doubt, after Desert Storm and all the other things that happened, 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 US 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.

• 2:33:05Ben Gilbert?

  And Boeing today, which is not Boeing, but Boeing and McDonnell Douglas, and this incredible era of consolidation.

• 2:33:12David Rosenthal?

  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.

• 2:33:21Ben Gilbert?

  Yeah. And then you have Raytheon and General Dynamics, which have eaten their fair share of all the other competitors, too.

• 2:33:28David Rosenthal?

  So the Gulf conflict, I think, ends in 91, I believe. And it becomes really obvious that the Cold War era of arms buildup in the US is over. And defense budgets are going to shrink massively.

• 2:33:43Ben Gilbert?

  And we need to start nuclear disarmament. We need to start destroying a lot of the nuclear warheads that we build.

• 2:33:48David Rosenthal?

  Right. And everybody in the industry knows it. And then it becomes super explicit. This is kind of an amazing event that happens in July of 1993. The then Deputy Defense Secretary, William Perry, calls the CEOs of all the major prime defense contractors to a dinner in Washington. At which he explicitly tells them, "Defense spending is going to shrink massively." 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."

• 2:34:32David Rosenthal?

  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.

• 2:34:53Ben Gilbert?

  Very explicitly. And this was rumored for a long time. People were like, wait, did this really happen? The US 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.

• 2:35:14David Rosenthal?

  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."

• 2:35:29Ben Gilbert?

  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 US to remain a country that has a whole bunch of people that know how to build this stuff. So if we need it, it's there.

• 2:36:11Ben Gilbert?

  But you're gonna put each other out of business because we just won't have enough for you. So you need to like, merge and get more efficient so we don't lose the muscle, but you all have..." Of 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.

• 2:36:40David Rosenthal?

  They are the customer.

• 2:36:41Ben Gilbert?

  Right. It is in the national interest for us to maintain this capability. Or so that's the sort of policy.

• 2:36:47David Rosenthal?

  Yep. So this sets off an amazing series of events. Kind of similar to harkening back to the LVMH episode when Louis Vuitton and Moet 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.

• 2:37:26Ben Gilbert?

  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.

• 2:37:46David Rosenthal?

  Do you know this because you looked up the mine safety disclosures?

• 2:37:49Ben Gilbert?

  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

• 2:37:58David Rosenthal?

  Oh, yeah.

• 2:37:58Ben Gilbert?

  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 Ls involved in creating this company. One of them was the investment bank that helped combine them.

• 2:38:25David Rosenthal?

  Lehman Brothers. Yes.

• 2:38:30Ben Gilbert?

  Frank Lanza, Robert LaPenta and Lehman Brothers are the Ls.

• 2:38:33David Rosenthal?

  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 Laurel for almost $10 billion. And then, as we said a minute ago, in July 1997, they attempt to merge with Northrop Grumman.

• 2:38:55Ben Gilbert?

  Right. This is like Lockheed Martin sort of like looks at the DOD and they're like, are we supposed to keep going?

• 2:38:59David Rosenthal?

  Yeah, like you told us to do this, right?

• 2:39:01Ben Gilbert?

  Yeah.

• 2:39:02David Rosenthal?

  They misread the tea leaves on that one. That merger gets announced. Every signed off, the DOJ blocks it, I assume with tacit approval from the DOD on that.

• 2:39:12Ben Gilbert?

  Yeah. I mean, the thing with the five big primes is they're all like very good at a certain bucket of things. And so if you start combining Lockheed and Northrop, which are the two that really kind of like bid against each other at this point in history, I mean, like the B2 bomber and the B21, like there's often this face off between Northrop and Lockheed. If you combine them, then you actually do away with all competition.

• 2:39:34David Rosenthal?

  Yep. Would have been so fitting, right? Given that Northrop was a co-founder of Lockheed. All the way back to the beginning of the episode. So the DOJ blocks that, but also in 1997, Boeing merges with McDonnell Douglas and becomes the giant that it is now.

• 2:39:50Ben Gilbert?

  Do you know why that happened?

• 2:39:51David Rosenthal?

  Oh, I do not.

• 2:39:53Ben Gilbert?

  So we're going to talk here in a second about the F22 program and the F35 program. We'll skip over the F22 for the moment, just to hit this point. For the JSF, the Joint Strike Fighter F35 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.

• 2:40:35David Rosenthal?

  Yeah, that was probably the end of McDonnell Douglas, once they got eliminated.

• 2:40:38Ben Gilbert?

  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.

• 2:40:53David Rosenthal?

  Do you know the size of the F-35 Joint Strike Fighter program, like in terms of dollars?

• 2:40:58Ben Gilbert?

  I do. It is a $30 billion DoD contract for 398 airplanes just for the US. We'll talk about that in a minute, but it was a prize worth going for.

• 2:41:09David Rosenthal?

  So yeah, if you lose this contract, this is literally life or death, whether you get this or not.

• 2:41:13Ben Gilbert?

  Right. So losing this creates some extreme combination.

• 2:41:17David Rosenthal?

  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, 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 Tellep, 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

• 2:42:00David Rosenthal?

  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

• 2:42:45David Rosenthal?

  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 Weston, Honeywell Electro Optics, Ford Aerospace, Libriscope, IBM Federal Systems, Unisys Defense, Lockheed, Martin Marietta, and Laurel. What a Frankencompany. 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

• 2:43:29David Rosenthal?

  and 450 million in net income. So both of these are like 10% or less net income margins.

• 2:43:36Ben Gilbert?

  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.

• 2:44:07David Rosenthal?

  Yep.

• 2:44:08Ben Gilbert?

  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.

• 2:44:22David Rosenthal?

  This is the stealth bomber.

• 2:44:23Ben Gilbert?

  Yeah. By all means, that should have gone to Lockheed Martin. They had the expertise from the F-117A Nighthawk and I mean, this is the Lockheed side of the story, but they beat the B-2 in a lot of the early competitions, but the government still gave the award to Northrop Grumman because there was some particular plane that the government said Northrop could manufacture a bunch of and then sell internationally and then change their mind. And so then Northrop was sort of left holding the bag. And so it was the Department of Defense being like, all right, you can win this competition. And who knows if any of these things are true, that's Lockheed side of the story. But anyway, Ben writes, "Under the current manufacturing arrangements for the B-2, Boeing makes the wings, Northrop makes the cockpit, LTV makes the bombays and the back

• 2:45:07Ben Gilbert?

  end of the B-2 airplane, in addition to 4,000 subcontractors working on bits and pieces of everything else. Because of the tremendous costs involved, this is probably a blueprint for how big, expensive airplanes will be built in the future. For better or for worse, this piecemeal manufacturing approach, rather than the Skunk Works way, will characterize large aerospace projects from now on. With many fewer projects, the government will have to spread the workaround across an even broader horizon. What will happen to the efficiency, the quality, and the decision-making? At a time of maximum belt tightening in aerospace, those are not just words, but may well represent the keys to a company's ability to survive." Yep.

• 2:45:49Ben Gilbert?

  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 timeframes take. So in 1981, the Air Force identified

• 2:46:34Ben Gilbert?

  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. Billion dollars in the total program cost.

• 2:47:06David Rosenthal?

  Wow.

• 2:47:07Ben Gilbert?

  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.

• 2:47:29David Rosenthal?

  I was wondering, I was like, did Ben misspeak there?

• 2:47:31Ben Gilbert?

  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.

• 2:47:57David Rosenthal?

  Wow.

• 2:47:58Ben Gilbert?

  Each plane ends up costing $360 million if you amortize all the R and D against the very few airplanes that they ended up making.

• 2:48:08David Rosenthal?

  Wow.

• 2:48:09Ben Gilbert?

  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 Seafare 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.

• 2:48:42David Rosenthal?

  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.

• 2:49:16David Rosenthal?

  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.

• 2:49:33Ben Gilbert?

  Yep.

• 2:49:34David Rosenthal?

  That we talked about, that was part of the real 3D revolution in video games.

• 2:49:39Ben Gilbert?

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

• 2:49:44David Rosenthal?

  Virtua Racer, Virtua Cop, Virtua Fighter being the big one. We're on that. Sega co-developed those boards with Lockheed Martin.

• 2:49:52Ben Gilbert?

  In order to model the stealth airplanes.

• 2:49:56David Rosenthal?

  Yes.

• 2:49:57Ben Gilbert?

  Unbelievable. That is insane.

• 2:49:59David Rosenthal?

  So fun.

• 2:50:01Ben Gilbert?

  So what we can see here is that sort of the classic, modern, boondoggle is probably the wrong word, but program gone awry, where there's a sensible total program cost for making a lot of airplanes. And then as there's more pressure on the budget over time, and there's cutbacks that happen, you end up making less and less airplanes. And so it's really hard to amortize all the R and D costs. And because of the way that these contracts work, it's not the tech company that's left holding the bag. It's not the contractor holding the bag. 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

• 2:50:41Ben Gilbert?

  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 and D across as many units.

• 2:51:01David Rosenthal?

  Wow. It's the R and D, but also the tooling, like we were talking about with the Blackbird.

• 2:51:06Ben Gilbert?

  Totally.

• 2:51:06David Rosenthal?

  The infrastructure that you need to spin up to make a new airplane is a lot.

• 2:51:13Ben Gilbert?

  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.

• 2:51:22David Rosenthal?

  The F-22 is built in 46 states?

• 2:51:25Ben Gilbert?

  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.

• 2:51:50David Rosenthal?

  You're talking about pork barrel politics.

• 2:51:52Ben Gilbert?

  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 re-elected. 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.

• 2:52:25David Rosenthal?

  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.

• 2:52:47Ben Gilbert?

  Yep. So then there's the next program that comes along, the F-35 Lightning II, 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 II, and they're going to make three models, and each of the models- Are for a different purpose. It's this incredible piece of technology.

• 2:53:29Ben Gilbert?

  One of the three models can actually angle its engine down and take off vertically using its engine to reposition. I don't think they can use this in combat, but they can like use it to move itself around on an aircraft carrier and stuff like that. 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

• 2:54:14Ben Gilbert?

  or a cybersecurity future, but you can see it drifting there. Really intense communications between a whole squadron of fighters, intense heads-up displays with digital stuff for the pilots in the cockpits and in their helmets. And so it's sort of like the most technology-forward plane program ever. So when I say big, I mean really big in terms of the number of orders that are going to be placed. The initial order book is approximately 3,000 airplanes worth a potential $200 billion for the total program cost. Wow. In practice, it's kind of as pork-barrely as the F-22.

• 2:54:57Ben Gilbert?

  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 a $30 billion order just from the US. $30 billion. That's 398 airplanes.

• 2:55:38Ben Gilbert?

  That is $750 million per airplane. The Swiss have placed an order for $6 billion for 36 airplanes. Finland bought 64, Germany 35, Greece 20, the Czech 24, Canada 88, Poland 32. Lockheed Martin, this is an enormous win to win this program. And it is among us and our allies, the largest ever purchase anyone has ever made for any piece of defense equipment.

• 2:56:07David Rosenthal?

  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.

• 2:56:30Ben Gilbert?

  Well, yeah, hopefully deterrence.

• 2:56:33David Rosenthal?

  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.

• 2:56:41Ben Gilbert?

  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. As you would expect, that's more than any other country in the world. It's 3% to 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%.

• 2:57:24Ben Gilbert?

  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.

• 2:57:29David Rosenthal?

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

• 2:57:40Ben Gilbert?

  Exactly. The military industrial congressional complex has really, it's almost like what's happened to the banking system. We like pseudo-nationalize a few companies. There's these too-big-to-fail entities that are like in cooperation with the government. Neither can really exist without each other. And we just are OK with that. We say, OK, that's how the system works. And for better or for worse, private industry and the government are tied at the hip there.

• 2:58:06David Rosenthal?

  Mm hmm.

• 2:58:07Ben Gilbert?

  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%. The total US government budget is $6 trillion. So defense in there at $800 billion clocks in, it's actually lower than social security, healthcare, and income security.

• 2:58:29David Rosenthal?

  Wait a minute, you said it was 3% to 4%.

• 2:58:31Ben Gilbert?

  It's 3% to 4% of GDP.

• 2:58:33David Rosenthal?

  Ah.

• 2:58:34Ben Gilbert?

  But it's 12% to 20% of the federal budget. So, OK, we know that of the $6 trillion budget, defense is less than social security, healthcare, 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, 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.

• 2:59:13David Rosenthal?

  Wow, not even just defense across all companies.

• 2:59:16Ben Gilbert?

  Across all companies.

• 2:59:17David Rosenthal?

  Wow, I knew they were the largest defense contractor, but I didn't realize they were the largest government contractor, period.

• 2:59:23Ben Gilbert?

  Yep, Lockheed, then Boeing, then General Dynamics, then Raytheon, then Northrop, then McKesson. Wow, you get to five before you even get to a healthcare.

• 2:59:32David Rosenthal?

  Wow.

• 2:59:33Ben Gilbert?

  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?

• 2:59:40David Rosenthal?

  Oh, it's gotta be like 90%.

• 2:59:42Ben Gilbert?

  It's close. It tends to hover around 75%. So $66 billion was Lockheed's total revenue last year, of which 50 billion came from the US federal government.

• 2:59:55David Rosenthal?

  Makes sense. And I get the rest, I would assume, would come from foreign governments.

• 2:59:59Ben Gilbert?

  Correct. Yeah, our allies. Because the US government basically has a rover on anything and can put the kibosh on Lockheed exporting to anyone. It's not terribly profitable. Their net income margin is 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 gonna slap 8, 9, 10, 11% on top of it, and that's gonna be the cost. And that is exactly why their financial statements look the way they do, is because that's exactly how the government decides to fund it.

• 3:00:43David Rosenthal?

  Which we should probably talk a little bit about the rationale for that. I'm no expert in this, and we should probably have an economist on ACQ2 at some point in time to talk about it. But my understanding is that while Warren Buffett and Charlie Munger 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 gonna be, but it's a incredibly important investment to make. And traditionally, that has been defense expenditures.

• 3:01:17Ben Gilbert?

  Yep.

• 3:01:17David Rosenthal?

  Like, we need the U2. We don't know what the cost is gonna be, but we need it to happen.

• 3:01:23Ben Gilbert?

  Yep.

• 3:01:23David Rosenthal?

  We need the Corona program. We don't know what the cost is gonna be, but we need it to happen. And I think that is the rationale of how we got here.

• 3:01:31Ben Gilbert?

  But it doesn't make sense when the government's buying more modern things like we're buying software as a service. Let's say I'm making Slack and I'm selling that to the government. If the contract to procure something that looks like Slack requires me to bid on it in a certain way, and I'm using Slack, there's lots of defense software you could sort of think about here. Palantir, for example, how do you let the government put out a contract to bid on that's structured a certain way when the way that you've decided to structure your company where you do R and D upfront, you're willing to take on some of the risk, and then you want to sell something and amortize your R and D across all of your customers, the way that every tech company does, and the way that you sort of get operating leverage on your company? That doesn't fit in these gigantic cost-plus contracts.

• 3:02:16Ben Gilbert?

  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.

• 3:02:31David Rosenthal?

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

• 3:02:45Ben Gilbert?

  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.

• 3:03:04David Rosenthal?

  And now, I think this is probably changing, and certainly there are smart people in the government that recognize this in their pilot programs to be able to buy software and technology. But if you look at some of the most successful Silicon Valley-style startups that are selling defense to the government, whether it's SpaceX or Android or others, yeah, they're selling hardware. They're not selling software solutions.

• 3:03:30Ben Gilbert?

  Yeah, I'd say we're in the first, out of the first inning in trying to figure out how to sell software to the Department of Defense.

• 3:03:37David Rosenthal?

  Which is sort of scary when you think about it because like, I suspect, you know, most acquired fans will not find this a controversial statement, but I think it's quite likely that modern warfare is going to occur more in software than in hardware, just like the Cold War occurred more in capabilities than actual fighting.

• 3:03:56Ben Gilbert?

  Yeah, and it's probably fair to say, I didn't talk to anyone at Lockheed, I'm not judging anyone who works at Lockheed, but I think the reputation in the industry is if you're a fantastic software engineer, you're probably going to go to a more interesting modern company, and that's why you see the Andorils of the world and the Palantirs of the world kind of sucking up top talent that has this as a thing that they're really passionate about working on.

• 3:04:23David Rosenthal?

  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.

• 3:04:45Ben Gilbert?

  Very different time we live in.

• 3:04:46David Rosenthal?

  Very, very different time.

• 3:04:47Ben Gilbert?

  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.

• 3:04:53David Rosenthal?

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

• 3:05:09Ben Gilbert?

  It is in the government's interest for everyone to feel safe and secure, and so you can sort of rise above Maslow's hierarchy and do other stuff with your life, and like, create, innovate, and live happy, prosperous, enjoyable lives, and go to work and do things that aren't for defense and drive the economy forward. It is also in the interest of the country to make everyone a little bit aware of how we have this incredible quality of life in the US. And I don't think we're indexed in that direction, even 1%. I think as you talk to people, there's a lot of reasonably oblivious, but well-intentioned

• 3:05:49Ben Gilbert?

  people who are like, not willing to give the credence to America's incredible military of why we get to enjoy such charmed lives in this country. And a lot of people that want to like, go la da da da da, we live in this amazing, globalized, wonderful world where no one needs to think about the military at all. And you're like, do you live on this planet? I love peace as much as anyone, and that should be the goal. And also, the default state of humans.

• 3:06:20David Rosenthal?

  Technology changes, human nature doesn't.

• 3:06:23Ben Gilbert?

  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.

• 3:07:04David Rosenthal?

  Yes, I totally agree with everything you're saying. I also think there's another layer to this, which is really a huge theme of this journey with the research and doing this episode for me with Lockheed. And that is the phenomenon of competition and its impact on human behavior. Probably for both the Soviet Union and the US, although I'm less equipped to talk about the Soviet Union. The fact of that competition led to tremendous advances for society. I mean, all the things we just talked about, Silicon Valley itself, for God's sakes, wouldn't have existed without this. So there is sort of a rational argument for having an adversary.

• 3:07:46David Rosenthal?

  Technology and society was pushed forward in America by the Cold War and by Lockheed as part of that.

• 3:07:54Ben Gilbert?

  Yeah.

• 3:07:56David Rosenthal?

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• 3:08:03Ben Gilbert?

  Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale.

• 3:08:13David Rosenthal?

  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.

• 3:08:34Ben Gilbert?

  This is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system so teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved.

• 3:08:46David Rosenthal?

  So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com/acquired to get started.

• 3:08:57Ben Gilbert?

  Well, we've already done a bunch of playbook stuff, so before we get into that formally codified analysis section, let's just talk about, real quick, the segments of Lockheed Martin today. So people understand, like, what do they actually do today? Because we've talked about a lot of this stuff. There's aeronautics, which in theory contains Skunk Works. So that's F-35s, F-22s, the old F-16s, the C-130J Hercules airlifter. The F-35, I believe, is the largest program generating 20% of all net sales across all segments.

• 3:09:29David Rosenthal?

  Wow, like you said, it is enormous.

• 3:09:31Ben Gilbert?

  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. 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 US government.

• 3:10:16Ben Gilbert?

  This is especially pre SpaceX or before SpaceX was as powerful as it is today. The US needed to contract launch services from someone. And so Lockheed and Boeing were both developing them. That didn't go terribly well and they ended up asking for bailouts from the government. And the government said, uh, can you two combine? And Lockheed Martin and Boeing came back and said, are you kidding me with that guy? No, these companies hate each other. And so, but they agreed to do it because they kind of had to. And so ULA is sort of this shotgun wedding between the two companies.

• 3:10:51David Rosenthal?

  Which, as we talked about on the SpaceX episode, really opened the door for SpaceX to come in and compete.

• 3:10:56Ben Gilbert?

  Totally. And the reason they didn't go well was because in sort of the pre SpaceX era, there were all these companies that wanted to put stuff in space that all ended up going out of business. You think like TeleDesic, Iridium, a lot of bankruptcies. And so Boeing had tooled up this huge factory. Lockheed had done this too. And so they were left holding the bag. And it got really ugly. Boeing was caught trying to steal proprietary data from Lockheed Martin. Ultimately, this JV has gone well. ULA is going to 2X their capacity to 25 launches a year, which is way more than they used to do, but still way less than SpaceX over the next five years or so with this Vulcan rocket. Still more expensive than SpaceX, but you know, they started from big incumbents rather than starting from a startup.

• 3:11:41Ben Gilbert?

  So it's just sort of a different disposition. Joint ventures are not permanent things and these companies kind of can't continue to be in business together. So ULA is up for sale and it'll be very interesting to see if one company or the other ends up buying it. But it is an important part of NASA's Artemis program and others moving forward. It's also important to Amazon. A whole bunch of the Kuiper launches are happening on ULA.

• 3:12:06David Rosenthal?

  Oh, interesting. Is that because Bezos doesn't want to launch on SpaceX?

• 3:12:11Ben Gilbert?

  Neither company will really like say anything about that.

• 3:12:15Ben Gilbert?

  Got to be something in there.

• 3:12:17David Rosenthal?

  Ah, billionaire competition.

• 3:12:18Ben Gilbert?

  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 nine to 14% margins. So they all are double digit percentage of revenue and double digit percentage of profit. So congratulations, we've got a conglomerate. All right, well, let's head into our analysis section. And this will be to kind of pull together a lot of the strings that we've mentioned on this episode, but codify like, what are the real takeaways?

• 3:13:02Ben Gilbert?

  And like, let's understand this business and this institution and what it is in our world today to kind of tie together some of the things we've teased at over the course of history here. And again, few caveats. One, we know we did not tell the entire Lockheed Martin story, nor could we. Two, this is not a political or defense podcast. You can tell that I'm a conflicted person on this. Let's start our analysis section with power. So what we do in this section is we analyze what it is about a business that enables it to achieve persistent differential returns. Or to put it another way, to be way more profitable than their closest competitor and do so sustainably.

• 3:13:47Ben Gilbert?

  And this is adapted from a framework that Hamilton Helmer created in his book, Seven Powers. The seven are counter positioning as a startup versus an incumbent, scale economies across a broad customer base, switching costs versus other near competitors, network economies, process power, branding, and cornered resource.

• 3:14:12David Rosenthal?

  I was really smiling as you were defining that as a persistent differential returns versus their competitors because I'm not sure that Lockheed has differential returns versus their competitors.

• 3:14:23Ben Gilbert?

  I don't know that there's really a market here.

• 3:14:26David Rosenthal?

  Yeah.

• 3:14:26Ben Gilbert?

  And power kind of comes only in markets.

• 3:14:30David Rosenthal?

  Yes, correct. For this, maybe it's more useful to talk about the prime contractor industry as a whole versus any specific player.

• 3:14:41Ben Gilbert?

  Well, all the players have the same profit margins, too.

• 3:14:44David Rosenthal?

  I guess where I was going with this is I think there's a cornered resource and process power that the prime contractor industry as a whole has. The cornered resources, they are the ones that get the prime contracts from the government. And then the process power, which I think probably is really legitimate, and 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?

• 3:15:15Ben Gilbert?

  Something like that. It's nuts.

• 3:15:17David Rosenthal?

  To orchestrate that and coordinate that into an airplane that does the things that that airplane does in practice, that's hard.

• 3:15:24Ben Gilbert?

  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?

• 3:15:31David Rosenthal?

  Didn't you say that different parts of the fuselage are made by different companies?

• 3:15:34Ben Gilbert?

  Yes, on different continents.

• 3:15:36David Rosenthal?

  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.

• 3:15:44Ben Gilbert?

  Right. Yeah, there's 100 years of know-how and 50 years of very well honed ways of engaging with the customer here. The customer, again, being the Pentagon.

• 3:15:54David Rosenthal?

  Right, the customer. It's like Big Brother, the customer.

• 3:15:58Ben Gilbert?

  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.

• 3:16:06David Rosenthal?

  Yep.

• 3:16:07Ben Gilbert?

  Maybe impossible.

• 3:16:09David Rosenthal?

  You know, Palantir has sort of done it. I guess Anduril is kind of doing it, but these I think are still pretty small scale compared to the big primes.

• 3:16:20Ben Gilbert?

  The $50 billion of spend that the one customer has with the one company.

• 3:16:25David Rosenthal?

  Yeah, it's really hard to break in and be a prime.

• 3:16:28Ben Gilbert?

  Yeah. I mean, it's funny, like Lockheed versus Northrop. There's not counter positioning, really. There's not scale economies because there's one customer to amortize costs across, but you're actually not doing any fixed cost stuff. Your customer is absorbing all the fixed cost stuff too.

• 3:16:50Ben Gilbert?

  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 a cornered resource, no.

• 3:17:34David Rosenthal?

  Not versus each other.

• 3:17:35Ben Gilbert?

  Yeah, right. So there really isn't power.

• 3:17:39David Rosenthal?

  Yeah.

• 3:17:39Ben Gilbert?

  Within the industry, but to the extent that you have already become one of these five, then together the five have power versus new entrants.

• 3:17:47David Rosenthal?

  Which is so funny. You know, you really, I think, kind of nailed it at the beginning when you said this isn't a market. It's not a market. And I guess, duh, obviously it's not a market because there's only one customer. You can't really have a market when there's only one player on one side of it.

• 3:18:02Ben Gilbert?

  Yeah, that's all I got for power.

• 3:18:04David Rosenthal?

  Yeah, me too.

• 3:18:05Ben Gilbert?

  So as we drift into playbook, I think the lens I kind of want to take on this, since we did so much analysis over the course of the episode is what are the big takeaways? Like, if I'm really sitting here stewing on all this, thinking about like, what matters in this episode? One of the big ones is that Lockheed Martin has a dual purpose for existing. There's all the normal stakeholders involved, customers, employees, and shareholders that they want to produce value for. But there's this second thing where they exist for the good of America and its interests, which causes some interesting second order effects. And one being, what is the optimal number of competitors in this space? The government tries to optimize this as a heavily interested party, but before 1993,

• 3:18:50Ben Gilbert?

  there were way too many competitors. After 1998, they determined, we don't want to have any fewer competitors. But it's sort of odd that there is a force that is not the market that is dictating how this plays out. Because that force, in this case, the US government, is sort of in charge of all of our well-being in a way where they don't trust that the market will look out for that. And when I say that, I mean, if you left a free market to play out, what would happen is, A, you'd sell arms to our enemies, which the government doesn't want. B, a bunch of companies would put each other out of business, and we might lose our industrial

• 3:19:35Ben Gilbert?

  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.

• 3:19:46David Rosenthal?

  Oh, this almost happened, right? The government didn't let Lockheed go out of business in the 1970s. This was right as the Kennon Satellite Project was getting going. We could not let Lockheed go out of business because we needed that.

• 3:20:01Ben Gilbert?

  Right. So a market cures a lot of problems, like price, serving the best product to customers. There are exceptions on all these things, but it doesn't solve for making sure that America stays globally competitive. And so the government has to put their hand on the scale in all these different ways in this market. For that reason.

• 3:20:24David Rosenthal?

  Yep. Well, globally competitive is an interesting way to put it. Safe and globally dominant. Let's put it that way.

• 3:20:30Ben Gilbert?

  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.

• 3:20:48David Rosenthal?

  Which also is a huge part of the military side of this complex.

• 3:20:52Ben Gilbert?

  Right. Of the 2 million people employed by the military in the United States, do we need all 2 million of them today? No, it's to keep people in reserve, literally.

• 3:21:01David Rosenthal?

  That's not a market-driven organization, nor I think would anybody argue it should be.

• 3:21:06Ben Gilbert?

  Right. Yeah, this gets into sort of the like arguments for and against the military industrial complex generally. So there's this like, A, keep the industrial base strong. It's good that we have this big spend on industry because like we need to have lots of people employed there and know all this stuff. There's this second one, which is like, it's literally a jobs program where you have congresspeople, 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,

• 3:21:47Ben Gilbert?

  the book basically just argues that this is all a massive misappropriation of funds and a whole bunch of people acting in their own self-interest and not for the country's self-interest.

• 3:21:56David Rosenthal?

  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.

• 3:22:06Ben Gilbert?

  Right. So this is an excerpt from that book. "The irony is that almost any other form of spending, from education to healthcare to mass transit to weatherizing buildings, even a tax cut creates more jobs than military spending." And that just falls on deaf ears over and over again with these programs, F22 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, ooh, good, jobs for Americans. And like, that is a terrible reason to fund something.

• 3:22:40David Rosenthal?

  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.

• 3:23:01Ben Gilbert?

  Yeah, I Google sort of cornering resources on really smart people despite the fact that they weren't getting any economic output out of them.

• 3:23:07David Rosenthal?

  Right.

• 3:23:08Ben Gilbert?

  I mean, the biggest argument again states all the way back to 1961 and Eisenhower's farewell address, he gave this sort of legendary military industrial complex speech where he says, "In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought by the military industrial complex. The potential for the disastrous rise of misplaced power exists and will persist."

• 3:23:33David Rosenthal?

  It's interesting, right? Two things. One, I think that was maybe in part from observing what was happening in the Soviet Union where the military and military spending overran the whole rest of the economy. Clearly, as we're talking about here, like, yeah, I think this is a nuanced issue and certainly a lot of degree of non-market based dynamics are warranted here. But you can't let the military industrial complex get so big it overruns the rest of the economy. That would not be good. The other thing I was going to say is I think the end of that quote or speech, or at least part of it is, Eisenhower sort of, I think, very naively puts forth, the solution is, what does he say, like, an engaged and vigilant citizenry, you know, a populace?

• 3:24:17David Rosenthal?

  Especially this day and age, where things are so complex, that's kind of not possible. You know, is the average person really going to dive into the details of how the F-35 program works? Like, no.

• 3:24:29Ben Gilbert?

  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-y.

• 3:24:36David Rosenthal?

  Right.

• 3:24:37Ben Gilbert?

  Yeah. There's another one I've been thinking about, which is a parallel to our SpaceX episode, where if you'll remember on the SpaceX episode, we talked about, and gosh, that was a lifetime ago, three years, about how NASA prioritized safety over everything else. And so they took that to such an extreme where things could happen on a 20-year time span instead of a five-year time span. And SpaceX came in and said, what if we do it on a two-year time span? And we figure out how to be much more iterative in our development, and we're happy to explode some rockets, not with people on them. And you sort of take this, again, much more Silicon Valley approach to rapid iteration, testing your

• 3:25:19Ben Gilbert?

  own prototypes internally, being okay showing off your failures and gathering data from them. Whereas NASA couldn't do enough calculations before it finally was willing to do something, to let something go to a launch pad. And that would cause extreme delays, massive budget overruns. And at the end of the day, it actually wasn't safer. That's the important thing here. In 130, or whatever it was, space shuttle missions, there were two that were tragic loss of life calamities. And so you look at that, you're like, that's actually not a great safety record. So maybe this isn't the right way to do it. Maybe calculating something to, you know, 15 significant digits of unlikely to fail is not actually

• 3:26:04Ben Gilbert?

  the best outcome. And it sort of seems like the same thing in the military industrial complex, where we're willing to sign a contract for airplanes that we get in 25 years because they're these like, 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.

• 3:26:38David Rosenthal?

  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,

• 3:26:54David Rosenthal?

  The heyday, glory days, whatever you want to call it of Lockheed, both with Skunk Works and LMSC, of how these small Skunk Works type organizations achieved unbelievable, unfathomable things with a small number of people in an unrealistically tight timeframe 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.

• 3:27:39David Rosenthal?

  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 timeframe, Kelly's 14 laws and LMSC's seven tenants are a pretty damn good way to do it.

• 3:28:12Ben Gilbert?

  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 just one aircraft. This aircraft will have to be shared between the Air Force and the Navy three and a half days per week, except for leap year, when it will be made available to the Marines for the extra day."

• 3:28:44David Rosenthal?

  He really is such a character.

• 3:28:45Ben Gilbert?

  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 and speed, we basically will have only billion-dollar airplanes going forward. They'll be made by everybody. There will be no new entrants.

• 3:29:15David Rosenthal?

  Innovation will happen very slowly.

• 3:29:18Ben Gilbert?

  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.

• 3:29:36David Rosenthal?

  Yep.

• 3:29:36Ben Gilbert?

  There will be some existential need to create something that these companies are bad at creating and that the US government doesn't know how to buy from them. And the United States will have to figure it out another way. And whether that's cybersecurity or whether that's information warfare or whatever it is, whatever threatens the American way of life, I have pretty high confidence the American government will figure out some way to make sure that we prepare for that issue, whatever that issue is. And it may or may not be from one of these companies. And it's very likely that the Skunk Works mentality ends up solving more problems for our country, but probably not from the Skunk Works division of Lockheed Martin.

• 3:30:18David Rosenthal?

  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.

• 3:30:28Ben Gilbert?

  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.

• 3:30:36David Rosenthal?

  Yep. You know what? That's a good way to put a threat. Kind of the, back to the LMSC tenant number one that we talked about so long ago in the story, a 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?

• 3:31:16Ben Gilbert?

  Yeah. No, I like that nuance.

• 3:31:18David Rosenthal?

  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 cash flow profitability, which is like, you gotta make payroll and you gotta like either get profitable or raise another round of funding or you're done.

• 3:31:42Ben Gilbert?

  Yeah, I think you're right. I think we're quickly sort of teasing out, there's sort of like two different things here. It's Lockheed Martin exists to ensure the Americanness continues. As we know it today, current course and speed, as protected as it needs to be with the types of protections we need. Great. We know where to get that and I have no doubt that will continue happening. And also there will be other motivations for people to form tight knit teams and accomplish great things. And like, those are going to be four other threats and happen by other groups of people. And I want to hear your thoughts on that. Maybe this is the place to leave it rather than grading this time. Let's come up with kind of the main takeaway, but I'm curious what you think.

• 3:32:22David Rosenthal?

  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.

• 3:32:44Ben Gilbert?

  Most people, yeah.

• 3:32:45David Rosenthal?

  Yeah, or 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.

• 3:33:04Ben Gilbert?

  All right. I think that's the right place to leave it. You want to do carve outs?

• 3:33:08David Rosenthal?

  Yeah, let's do it. My carve out is a fun one. I was reminded of because my favorite video game history podcast series, Resonant Ark is covering it as their game right now. I think I might've had this as a carve out a couple of years ago. The game near automata is a super fun game. And the series that Resonant Ark is in the middle of is their video game storybook club going through it. It's both a really fun game to play and was kind of ahead of its time. The sort of theme of the game is all about can machines think and feel? And what does that look like? And like, oh, it was like really thought provoking at the time. It's particularly thought provoking right now in our era of, you know, OpenAI and GPT

• 3:33:53David Rosenthal?

  and Generative AI and all that. So it's really fun to revisit that along with the great resident art guys right now, talking about the themes of that story.

• 3:34:03Ben Gilbert?

  Nice. You'll have like a whole niche of people that are listening to your carve outs for video game, video game recs.

• 3:34:11David Rosenthal?

  Totally.

• 3:34:12Ben Gilbert?

  I have two. One is something that didn't quite fit anywhere in this episode, but if you love airplanes and you are excited about the SR71, you should Google the SR71 Blackbird Speed Check Story. 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, very boring carve out, but it's something I've found surprising. Ego Lawn Tools, EGO is the brand. They make effectively the Tesla of lawn mowers.

• 3:34:55Ben Gilbert?

  And growing up, I had like a big gas lawnmower and you'd like pull a cord to start it and it was loud and it was smelly and it was dirty and it was like gas. And these are battery powered lawn mowers that are insanely powerful. I have a leaf blower also that lasts like 30 minutes off of just a battery.

• 3:35:13David Rosenthal?

  Look at you. You're just becoming a dad.

• 3:35:15Ben Gilbert?

  I'm finding some like very good catharsis in, I just throw on my audiobook and as I'm researching an acquired episode and like go do lawn work for six hours. And I find that to be like greatly gratifying to get away from a screen.

• 3:35:29David Rosenthal?

  I've chosen to go the higher gardener's route on this.

• 3:35:34Ben Gilbert?

  You can, you also have a, a two-year-old. So that takes more of your time.

• 3:35:39David Rosenthal?

  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.

• 3:35:50Ben Gilbert?

  More systems integration. All right, listeners, thank you so much for joining us. If you want to become an LP, we would love to have you. Help us pick more episodes like this one in the future. acquired.fm slash LP. And when I get back from 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 interviews are going to be.

• 3:36:17David Rosenthal?

  Oh, they are going to be great.

• 3:36:19Ben Gilbert?

  Even the ones that are live now, the one we just did with Jake, the one with Avlok from Angel List, the one with David from Retool, fantastic, Kamakshi with her company Samuha, all like really fascinating discussions. Look up ACQ2 in any podcast player. Now that you're done with this episode, come discuss it with us. acquired.fm slash Slack, we'd love to have you.

• 3:36:42David Rosenthal?

  And particularly too, I think there's a good chance with this episode that we'll have a lot of new to acquired folks who are listening. We unexpectedly had that in huge numbers with our LVMH episode. All sorts of new people coming in and experiencing acquired and listening to us for the first time. If you're doing that now here with this Lockheed episode, definitely go check out some of our other episodes on other industries. And I just want to second what Ben said. Join the Slack and come talk about it with us. We love hearing from people, you know, we're obviously not in the defense industry. We love hearing from people who are. Tell us about your experiences, what it's like, what we got right, what we got wrong, and educate all the rest of us in the community, too.

• 3:37:22Ben Gilbert?

  Yep, seriously. All right, with that, listeners, we'll see you next time.

• 3:37:26David Rosenthal?

  We'll see you next time.