Story Behind 'The Secret History' Part III: The Most Important Company You Never Heard Of

This is Part III of how I came to write “The Secret History of Silicon Valley.” Read Part I here and Part II here.

1978. Two years out of the Air Force, serendipity (which would be my lifelong form of career planning) found me in Silicon Valley working for my first company: ESL. If you’re an entrepreneur, ESL is the most important company you’ve never heard of. If you are a practitioner of Customer Development, ESL was doing it before most us were born. If you think the Cold War turned out the right side up (i.e. Communism being a bad science experiment) ESL’s founder Bill Perry was moving the chess pieces. And no one who really knew could tell you.

Bill Perry’s public life as Secretary of Defense and his subsequent work in preventing nuclear proliferation and nuclear terrorism is public knowledge. But part of his life that that doesn’t even merit a Wikipedia entry is that Bill Perry used Silicon Valley to help end the cold war.

Fred Terman Sent Us

In 1953 the U.S. Army needed to build missile and proximity fuse jammers and Quick Reaction Capability (QRC) systems (translation: the other side just came up with something that’s killing us in a shooting war, get us a fix quick.) The Army offered Fred Terman, the Dean of Engineering at Stanford, a $5M contract to build an electronics countermeasures lab. When Terman said no, Sylvania, a tube company which built proximity fuse tubes in WWII, won the contract and set up its Electronic Defense Lab (EDL) in Mountain View California in the middle of an orchard. Terman became a consultant to the company.

In ten years Sylvania EDL grew to be one the largest companies in the valley − 1300 people were working on electronic countermeasures and electronic intelligence. By 1961 its customers now included our intelligence agencies. (BTW, when the customers were “three-letter” intelligence agencies, contractors used an oblique way of talking about who they were working for: they were all referred to as simply the “customer.”)

In 1964, Bill Perry, the head of the lab, frustrated with GTE’s management, quit (GTE, a phone company had bought Sylvania in 1959.) And in the tradition of great startups, on the way out Perry took 6 of his best managers with him.

At ESL Military Intelligence Was No Longer an Oxymoron

Perry not only took his best managers, but he also took his customers, and his desire to build a company culture that was the antithesis of working for a phone company. In building ESL Perry made a conscious choice to emulate Hewlett Packard (then considered the “gold standard” of a great technology company.) HP had an ethical culture, entrepreneurial spirit, and deep Stanford engineering department connections. One key difference: unlike HP, which had restricted stock ownership to the founders and top management, Perry made sure everyone at ESL had stock. There were no venture investors. The “customers’” contracts funded the company. Seven years later in 1971 ESL went public.

Not surprising with a CEO with a PhD in Math, at ESL the engineers ran the company, pursuing bleeding-edge designs in antennas, receivers and microwaves – at times hand in hand with Stanford’s engineering department. (Some of this stuff was so advanced that the rumors were that we got it from the alien spacecraft hidden at Wright-Patterson Air Force base.)

ESL was unique among the “we do microwaves” that the Valley specialized in before it was Silicon Valley. ESL was a systems company that used computers, and in the mid-1960’s using computers for electronic intelligence was considered revolutionary. ESL specialized in embedding minicomputers in electronic intelligence systems, turning a tedious manual process into one that looked like magic. The “customers” in Washington had never seen anything like it.

While those computer-based systems paid the bills, Perry’s even more profound insight would change the outcome of the Cold War.  Up until ESL, radio and radar signals had always been received by analog receivers.  ESL realized that by turning these radio waves into computer bits, ones and zeros, they could be processed in ways that had been considered theoretically impossible.  ESL’s systems allowed signal extraction and correlation against targets the Soviet Union thought were undetectable and impenetrable. But this digital world required new theories, and new devices – two items provided by Silicon Valley in the form of Stanford’s engineering department and the emerging/booming semiconductor business.

ESL and “the Customer” – No Such Agency

ESL kept getting business and growing mostly through unsolicited bids. Because they were extremely good at what they did, most of the contracts they won were “sole source.” However, it didn’t hurt that Perry several allies at the “customer.” One of them, Bud Wheelon, had been a classmate of Perry’s at Stanford and they both had worked on the electronic intelligence collection problem, Perry at Sylvania EDL and Wheelon at the Space Technology Lab at Ramo Woolridge. In 1962 Wheelon left for a new job as the first director of the CIA’s Directorate of Science and Technology where he was responsible for development of OXCART, the A-12 Spyplane, and three major satellite reconnaissance systems.  These would be the heart of ESL’s business.

A-12 OXCART CIA Spyplane

ESL found other ways to stay very close to its customers. Forty years before Customer and Agile Development methodologies became popular, ESL had analysts from its “customer” sitting side-by-side with ESL engineers designing new equipment together. And in the 1960s ESL’s customers asked the company to analyze and interpret telemetry data even though this was a traditional function of the “customer.” In five years, ESL went from a plucky startup to the market leader in Sigint and telemetry intercepts. While it was a for-profit company, Perry believed ESL’s goal was to serve the national interest instead of just the stockholders. He identified with their customers, not shareholders. If there was a conflict between profits and doing the right thing, at ESL the goal was to “think of the country first.” Yet ESL was just act one for Bill Perry.

Yes We Can – Dumping Detente – Bill Perry and “the Revolution in Military Affairs”

After 20 years of an escalating arms race, the Nixon administration decided to take a new approach to dealing with the Soviet Union: Détente. Kissenger’s thinking was: history may be tilting to the Communists and we may not be able to win the struggle with the Soviet Union so let’s settle for parity. Yet while the U.S. had been engaged in the Vietnam War, and had agreed to parity in nuclear weapons, Soviet forces in Europe had built a 3 to 1 advantage in tanks, artillery, armored personnel carriers, and soldiers, all under Détente.

In response the U.S. dumped Détente and embraced a new strategy to counter the Warsaw Pact by not matching them tank for tank or solider to solider. The new insight was that we could change the game completely and take advantage of a lead we had that was getting longer every day – by using our computer and chip technology to aggressively build a new generation of weapons that the Soviet Union could not.

At the heart of this idea was something called “precision strike,” what we would today call smart bombs or precision guided munitions. But this new strategy was more than making the bombs smarter. It involved building stealth aircraft to deliver these precision weapons unseen by any enemy radar, and designing intelligence and reconnaissance systems that would target for them. Smart weapons, smart sensors, and stealth.  And the heart of all of this were microwaves, silicon chips, electronics and computers that only the U.S. could design and produce, and a good part of it was coming from Silicon Valley.

The Arms Factories that Won the Cold War Were Semiconductor Factories

Who was the government official pushing all of this? It was none other than Bill Perry, who had become the head of Research and Engineering for the Defense Department. From 1977 to 1981 Perry cranked up spending for research and development on a massive scale. The budget for the Defense Advanced Research Projects Agency (DARPA) doubled (with the Assault Breaker to turn U.S. asymmetric technology advances into weapons), and huge “smart weapons” defense programs like the F-117 stealth ground attack plane and the B-2 stealth bomber; precision guided munitions; JSTARS, a surveillance system; and the satellite Global Positioning System (GPS); MX missile; Trident submarine; and Tomahawk cruise missiles.

F-117 Nighthawk – 1st Stealth Ground Attack Plane

These changes in American defense policy spooked the Soviets. The Chief of Staff of the Red Army said that this “Offset Strategy” was revolutionizing contemporary warfare and posed a military threat that the Red Army could not match. “We cannot equal the quality of US arms for a generation or two. . . . We will never be able to catch up with you in modern arms until we have an economic revolution. And the question is whether we can have an economic revolution without a political revolution.”

The U.S. Cold War strategy had gone from a “let’s be friends” to a “yes we can win” strategy. By the mid 1980s Ronald Reagan was cranking U.S. defense spending even higher. Gorbachev, now the Soviet Premier, had to grapple with the spiraling cost of military systems that weren’t amortized by consumer purchases. Arms control with the U.S. and massive cuts in weapons and the military seemed like the only way out. And the rest is history.

Bill Perry was my first boss in Silicon Valley.
He put us on the path to use Silicon Valley as a weapon in the cold war.

My small part as a foot solider in this adventure is in the next post,“The Secret History of Silicon Valley” Part IV here.