In the video game industry, a first-party developer is part of a company which manufactures a video game console and develops exclusively for it. First-party developers may use the name of the company itself (such as Nintendo), have a specific division name (such as Sony's Polyphony Digital) or have been an independent studio before being acquired by the console manufacturer (such as Rare or Naughty Dog). Whether by purchasing an independent studio or by founding a new team, the acquisition of a first-party developer involves a huge financial investment on the part of the console manufacturer, which is wasted if the developer fails to produce a hit game in a timely manner. However, using first-party developers saves the cost of having to make royalty payments on a game's profits.
Second-party developer is a colloquial term often used by gaming enthusiasts and media to describe game studios who take development contracts from platform holders and produce games exclusive to that platform. As a balance to not being able to release their game for other platforms, second-party developers are usually offered higher royalty rates than third-party developers. These studios may have exclusive publishing agreements (or other business relationships) with the platform holder, but maintain independence so upon completion or termination of their contracts are able to continue developing games. Examples are Insomniac Games (originally a 2nd party for Sony), Remedy Entertainment (originally a 2nd party for Microsoft) and Game Freak (a 2nd party for Nintendo).
Activision in 1979 became the first third-party video game developer, where the term "second-party" originally referred to the consumers. A third-party developer may also publish games, or work for a video game publisher to develop a title. Both publisher and developer have considerable input in the game's design and content. However, the publisher's wishes generally override those of the developer.
The business arrangement between the developer and publisher is governed by a contract, which specifies a list of milestones intended to be delivered over a period of time. By updating its milestones, the publisher verifies that work is progressing quickly enough to meet its deadline and can direct the developer if the game is not meeting expectations. When each milestone is completed (and accepted), the publisher pays the developer an advance on royalties. Successful developers may maintain several teams working on different games for different publishers. Generally, however, third-party developers tend to be small, close-knit teams. Third-party game development is a volatile sector, since small developers may be dependent on income from a single publisher; one canceled game may be devastating to a small developer. Because of this, many small development companies are short-lived.
A common exit strategy for a successful video-game developer is to sell the company to a publisher, becoming an in-house developer. In-house development teams tend to have more freedom in the design and content of a game compared to third-party developers. One reason is that since the developers are employees of the publisher, their interests are aligned with those of the publisher; the publisher may spend less effort ensuring that the developer's decisions do not enrich the developer at the publisher's expense.
In recent years, 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 (with their own culture and work practices). For example, Activision acquired Raven (1997); Neversoft (1999), which merged with Infinity Ward in 2014; Z-Axis (2001); Treyarch (2001); Luxoflux (2002); Shaba (2002); Infinity Ward (2003) and Vicarious Visions (2005). All these developers continue operating much as they did before acquisition, the primary differences being exclusivity and financial details. Publishers tend to be more forgiving of their own development teams going over budget (or missing deadlines) than third-party developers.
A developer may not be the primary entity creating a piece of software, usually providing an external software tool which helps organize (or use) information for the primary software product. Such tools may be a database, Voice over IP, or add-in interface software; this is also known as middleware. Examples of this include SpeedTree and Havoc.
4th Party Video Games/Licensed Game/Tie-in
4th Party is a new term to refer licensed tie-in games whether if it's based on movies, TV shows, comic books and manga. They are referred to as 4th party for their negative reputations with the majority of tie-in games being panned by critics. These games usually advertise a popular non-gaming franchise or to advertise an upcoming movie. Most tie-ins also have fighting game spin-offs as well. These games are usually made by the studio's gaming division (ex. Spongebob Squarepants games are developed by Nickgames which is the gaming division for Nickelodeon) and a license given to a 3rd party developer to publish the game. This infamous trend was started by the Atari 2600 spin-off of which was responsible for the video game crash.
Indie game developers
Independents are software developers which are not owned by (or dependent on) a single publisher. Some of these developers self-publish their games, relying on the Internet and word of mouth for publicity. Without the large marketing budgets of mainstream publishers, their products may receive less recognition than those of larger publishers such as Sony, Microsoft or Nintendo. With the advent of digital distribution of inexpensive games on game consoles, it is now possible for indie game developers to forge agreements with console manufacturers for broad distribution of their games.
Other indie game developers create game software for a number of video-game publishers on several gaming platforms.
In recent years this model has been in decline; larger publishers, such as Electronic Arts and Activision, increasingly turn to internal studios (usually former independent developers acquired for their development needs).