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Prior to 1979, there were no third-party developers; console manufacturers like Atari made their own games for their (deleted 'own') systems. This changed with the formation of Activision in 1979. Activision was founded by four Atari programmers who left the company because Atari did not allow credits to appear on their games and did not pay employees a royalty based on sales. At the time, Atari was owned by Warner Communications, and the developers felt that they ought to receive the same recognition that musicians, directors, and actors did from Warner's other divisions. The four programmers, already knowing the Atari VCS system (deleted already), were able to build and develop their own games and cartridge manufacturing processes. After Activision went into business, Atari quickly sued to block sales of Activision's products, but failed to secure a restraining order and ultimately settled the case in 1982, with Activision agreeing to pay royalties to Atari but otherwise legitimizing the third-party model. Activision games were as popular as Atari's, with Pitfall! in 1982 drawing over four million units sold.

Previous to 1982, only a few third-party developers besides Activision were making games for the Atari VCS. These included Imagic, Games by Apollo, Coleco, Parker Brothers, CBS Video Games, and Mattel. By 1982, Activision's success led numerous other companies to join them. However, Activision's founder David Crane observed that several of these companies were supported by venture capitalists attempting to emulate the success of Activision, not only for the Atari VCS but other consoles, and relied on inexperienced computer programmers. Without the experience that Crane and his team had, many of these games were of poor quality, with Crane describing them as "the worst games you can imagine". Companies lured away each other's programmers or used reverse engineering to learn how to make games for proprietary systems. Atari even went as far as hiring several programmers from Mattel's Intellivision development studio, which prompted a lawsuit by Mattel against Atari that included charges of industrial espionage.

The rapid growth of the third-party game industry was evident by the number of vendors present at the semi-annual Consumer Electronics Show (CES). Crane recalled that during the six months between two consecutive CES events, the number of third-party developers jumped from 3 to 30. At the Summer 1982 CES, there were 17 companies, including MCA Inc., and Fox Video Games that announced 90 new Atari games. By 1983, an estimated 100 companies were dying to get a foothold in the video game market via the CES. AtariAge documented 158 different vendors that had developed for the Atari VCS. In the second half of 1982, the number of cartridges grew from 100 in June to more than 400 by December.

Experts predicted a glut in 1983, with only 10% of games producing 75% of sales. BYTE stated in December that "in 1982 few games broke new ground in either design or format ... If the public really likes an idea, it is milked for all it's worth, and numerous clones of a different color soon crowd the shelves. That is, until the public stops buying or something better comes along. Companies who believe that microcomputer games are the hula hoop of the 1980s only want to play Quick Profit." Bill Kunkel said in January 1983 that companies had "licensed everything that moves, walks, crawls, or tunnels beneath the earth. You have to wonder how tenuous the connection will be between the game and the movie Marathon Man. What are you going to do, present a video game root canal?" By September 1983 the Phoenix stated that 2600 cartridges "is no longer a growth industry". Activision, Atari, and Mattel all had experienced programmers, but many of the new companies rushing to join the market did not have the expertise or talent to create quality games. Titles such as Ralston Purina's dog food-themed Chase the Chuckwagon, the Kaboom!-like Lost Luggage, rock band tie-in Journey Escape, and plate-spinning game Dishaster, were examples of games made in the hopes of taking advantage of the video-game boom, but later proved unsuccessful with retailers and potential customers.