Third-party developers are usually called upon by a video game
publisher to develop a title for one or more systems. Both the
publisher as well as the developer have a great deal of say as to
the design and content of the game. However, in general, the
publisher's wishes trump the developer's, as the publisher is
paying the developer to create the game.
The business arrangement between the developer and publisher is
governed by a contract, which specifies a list of milestones
intended to be delivered, for example, every four to eight weeks.
By receiving updated milestones, the publisher is able to verify
that work is progressing quickly enough to meet the publisher's
deadline, and to give direction to the developer if the game is
turning out other than as expected in some way. When each milestone
is completed and accepted, the publisher pays the developer an
advance on royalties. The developer uses this money to fund its
payroll and otherwise fund its operations.
Successful developers may maintain several teams working on
different games for different publishers. Generally, however,
third-party developers tend to be small, and consist of a single,
close-knit team.
Third-party game development is a volatile business, as small
developers may be entirely dependent on money from one publisher. A
single canceled game can be lethal to a small developer. Because of
this, many of the smaller development companies last only a few
years or sometimes only a few months. The continual struggle to get
payment for milestones and to line up the next game contract is a
persistent distraction to the management of every game
developer.
A common and desirable exit strategy for an extremely successful
video game developer is to sell the company to a publisher, and
thus become an in-house developer.
In-house development teams tend to have more freedom as to the
design and content of a game, compared to the third-party
developers teams. Part of the reason for this is that since the
developers are employees of the publisher, their interests are as
exactly aligned with those of the publisher as is possible. The
publisher can therefore spend much less effort making sure that the
developer's decisions do not enrich the developer at the ultimate
expense of the publisher.
In recent years the larger publishers have acquired several
third-party developers. While these development teams are now
technically "in-house" they often continue to operate in an
autonomous manner, each with its own culture and work practices.
For example: Activision acquired Raven (1997), Neversoft (1999),
Z-Axis (2001), Treyarch (2001), Luxoflux (2002), Shaba (2002),
Infinity Ward (2003) and Vicarious Visions (2005). All these
developers continue to operate much as they did before acquisition,
with the primary differences being in exclusivity and the financial
details.
History has shown that publishers tend to be more forgiving of
their own development teams going over budget and missing deadlines
than third-party developers.
An in-house development team that works for a console hardware
manufacturer is also known as a first-party developer. A company
that is closely tied to a console manufacturer (or occasionally a
publisher) is known as a second-party developer. Rather confusingly
the publishers themselves are sometimes referred to as third-party
developers in the context of their relationships with the console
manufacturers (Sony, Microsoft and Nintendo). This particular
distinction of first, second and third party developers does not
generally apply to PC games development.
Another example is a developer that is a separate legal entity
from the software being used, usually providing an external
software tool that helps organize or use information for the
primary software product. Such tools could be a database, Voice
over IP, or add-in interface software, among others. This is also
known as middleware.
In addition, accessories like headsets can be referred as third
party headsets, meaning that the company of the headset is
different from the console company. For example, Turtle Beach is a
third party headset company to the PlayStation 3 and Xbox 360.