Written by Michail Katkoff , a a battle-tested game industry veteran who’s seen every production model—and now argues that co-development is the only one that scales. Hollywood figured it out first. The era of one studio doing everything in-house is over.
Every blockbuster you watch now? Built by a constellation of specialized production companies. Outsourcing, once a stopgap for late milestones and low-priority assets, has morphed into what is now referred to as the external development production model.
It’s not a luxury. Not a crutch either. In the era of efficiency, mastering external development has become a necessity.
I can see us entering into the age of strategic co-development, where AI-driven workflows and lean internal teams punch above their weight by scaling through the right partners. It used to be who could build the most in-house. And for many developers, it still is this way.
To get to the bottom of external development, I sat down with Carla Rylance—external dev veteran and XDS Advisory Chair—to dig into the just-released 2025 XDS Insights Report. Check out our full conversation on the 10 big questions shaping how publishers and external developers work together. 1.
External Development Post-COVID: Strategic or Still Scrappy? 70% of publishers now spend over $6M/year on external development. source XDS Report COVID didn’t just normalize remote work.
It legitimized external collaboration. What started as survival became strategy. ” Today, co-development is the new default.
Seventy percent of publishers now spend over $6 million a year on external development. This isn’t a side hustle. It’s infrastructure.
And even with the return-to-office mandates, you can expect that the reliance on external development will only expand. 2. AI in External Development: Hype, Hope, or Hell?
While publishers are jumping on the AI train, external development studios are barely touching it. This sounds off, especially since publishers have been able to push cost increases on the external developers. Source: XDS Report Publishers are all in on AI.
Seventy-eight percent are using it—mostly for ideation, concept reference boards, and automating tedious workflows. But service providers? They’re barely touching it.
Many can’t. Contracts prohibit it. Risk departments frown on it.
Legal hasn’t caught up. The result? ) tiptoe around it downstream.
3. Where Will AI Hit Hard? Both publishers and developers agree: Concept Art will be hit next.
Source: XDS Report Publishers love AI for ideation. Service providers see gold in procedural content and AI-assisted coding. But both sides agree: concept art is on the chopping block .
Quietly, studios are admitting their AI-generated references are as good—or better—than early concept work. It’s not production-ready yet. If you’re a concept artist, you have two options: Option 1: You can go all in on AI and become a visual development machine.
Option 2: Fight the machine. Demonstrate against the use of AI. Refuse to learn the tools.
My advice? Learn from Terminator 2 and work with the robot and against the robot. 4.
Why Quality Still Rules, Even in a Budget Crisis 75% of all publishers prioritize quality over price. Source: XDS Report Cost-cutting is in full swing. But quality still tops the list of why studios stick with partners.
That said, “cost” is gaining ground. Rate sensitivity is peaking. And what studios now want is trusted excellence at predictable prices .
If you’re great but unpredictable, you’re replaceable. If you’re good and stable, you’re gold. As long as you don’t try to renegotiate the prices… 5.
No New Friends or Vendors 38% of publishers have no intent to switch partners. Risk aversion is driving retention. source: XDS Report Thirty-eight percent of publishers say they aren’t looking for new partners.
Not because they’re lazy. Because they’re scared of the downside. New vendors mean new risks, new onboarding, and new timelines.
In a market full of layoffs, delays, and canceled projects, stability is worth more than a discount. This makes it harder for new service providers to find clients, especially since the number of new projects has massively declined after 2022. With no quick wins in sight, focus on servicing your existing customers better.
You’re tied to their success. So go an extra mile and help them to avoid the death valley, because when that project gets shut down, you’ll contract will end the same day. 6.
Couldn’t Close the Client? Geography Is Probably Why 50% of publishers cite geography as the #1 blocker to not work with an external developer. 38% of publishers have no intent to switch partners.
Risk aversion is driving retention. Source: XDS Report According to the report, the #1 reason studios don’t outsource is logistics—time zones, geography, and communication lag. Not price.
Not capability. Just the pain of coordinating across the globe. That’s why the biggest vendors—Virtuos, Keywords, Devoted—aren’t just global.
They’re local everywhere that matters . If you’re a publisher, don’t even entertain offers from far-flung time zones. It’s not worth the effort.
7. Rates Are Flat. Margins Are Shrinking.
Welcome to the Squeeze. Only 37% of external developers plan to renegotiate rates. Publishers are in the driving seat as external developers are forced to eat the rising costs.
Source: XDS Report Service providers are forced to eat inflation. Rates haven’t gone up. Profits are going down.
Only a third of vendors even plan to renegotiate pricing this year. Contracts are shorter. Payment cycles are slower.
It’s officially a buyer’s market —and unless you’re uniquely positioned, it’s not getting better anytime soon. As a service provider, this means you have to get efficient and effective. 8.
One-Third of Publishers Expect No Growth. Should You Panic? “No-growth” sentiment is up 3x since 2023 for service providers.
On the other hand, the publishers are overall feeling way more optimistic than the third-party developers. Source: XDS Report The tighter budgets and smaller teams should increase demand for external dev. Yet in practice, greenlights are down, and publishers are cautious.
Carla thinks the rebound is coming. As a representative of external developers, she couldn’t really think otherwise. But it’s not here yet.
If you’re a smart studio, opportunity knocks. 9. Security Just Became the Newest Selection Criteria.
Here’s Why. Security requirements are rapidly becoming more important for publishers. Source: XDS Report Studios don’t just want good work.
They want safe hands. Security protocols, compliance certifications, and financial audits are fast becoming table stakes. Some AAA contracts now take years to clear.
If you’re not SOC2-ready or can’t lock down your pipelines, don’t expect to work on those tentpole franchises. At the same time, it’s hard to justify the investments in security improvements if you’re not working with the big boys. Talking about the chicken and the egg… 10.
Is External Dev Now Core? Yes. But Only If You’re Smart.
Unsurprisingly, the main reasons to work with a third-party developer are related to flexibility and cost savings. Source: XDS Report The model is simple. Internal teams stay lean.
External partners bring scale. AI boosts speed. But none of this works without strategy.
You can’t just throw specs over the fence and hope for magic. You need tight briefs, strong communication, and internal leaders who know how to manage external bandwidth. External development isn’t a shortcut anymore.
It’s a lever. If you’re pulling it right, you’re shipping faster, spending smarter, and building bigger games with smaller teams. If you’re not, you’re probably wondering why your timelines keep slipping.
Philosophical Musing Pre-COVID, working with an external partner was often seen as a workaround: overflow management, a contingency, something to help you hit milestones when internal bandwidth ran dry. But once every team went remote, studios started asking a deeper question: if everyone’s working from home, why can’t our employees be replaced with more flexible and cost-efficient external developers? The mindset of working with external studios as co-developers has lasted.
Co-development has now taken root as the dominant model. It’s no longer about handing off a block of work—it’s about integrating external partners into your process. From 2021 onwards, the spending on external development has exploded, particularly in the $6M–$10M range, suggesting deeper, longer-term commitments.
” In other words, it’s not just tactical anymore, it’s strategic. If you want to build a game at scale in 2025, especially with a lean core team and venture capitalists or shareholders breathing down your neck, external partners are no longer optional. They are central.
It’s no longer something you do when you’re underwater. The winners of the future will be the biggest. Just like today, but different.
They won’t be the biggest by headcount. They’ll be biggest in how they orchestrate a network of reliable co-development partners. Biggest at scaling through others.
Biggest in keeping costs at bay. The old model is quickly becoming obsolete. The most expensive thing in producing movies is working on a movie when you don’t really know what the film is about or who it is for.
The second most expensive? Trying to produce the film alone.
Deconstructor of FunJune 10, 20257 min read