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The Story Back in the early days, I'm talking in the beginning, the only companies making games where those companies that made the systems. The only games available for the Atari were games made by Atari. All the profits were kept in house and the companies never consorted with each other. After Atari started enjoying such huge success with their 2600, the designers of the games started to feel a bit left out, never enjoying the fiscal rewards that Atari was. In addition, they weren't even recognized as having a part, the games were Atari's, and nothing more. So in 1979 programmers David Crane, Larry Kaplan, Alan Miller and Bob Whitehead decided to leave Atari and start their own company. They weren't going to make their own game system, but games for existing systems. It had never been done before, they became the first 3rd-party developer for home consoles. Like a couple going through an ugly divorce, it would not be a clean break.
After trying to negotiate deals within Atari that would give them the same rights and protections of other artists, the 4 decided to leave and start their own company. With the help of Joe Decuir (a hardware engineer at Atari who helped develop the 2600 but left to start his own company), they rounded up an attorney and discussed what it would take to leave Atari and develop games on their own.
They brought on Jim Levy, who had experience in the music industry to handle the business side of things. And with that Activision was born. Atari wasn't exactly happy about them leaving. On account of the fact that these programmers made up over half of Atari's development team at the time, it was a tough pill for Atari to swallow. Too tough actually, and they decided to sue to prevent them from making games for their system. They had little choice. They made all their profit on the games they sold. Just like today the system is sold at a loss and then profits made off software. 
Legal issues aside, Activision began to produce some of the best games the Atari had seen. First came Dragster by David Crane, released in 1980. This made it the first independently developed title for the 2600. Activision took off like a rocket, creating a mess of titles that to this day are considered classics. Titles like Kaboom!, Barnstorming, Freeway, Chopper Command, Laser Blast, Megamania, Stampede, River Raid, Pitfall, and more. It's quite a list of titles really, and at the time they looked and played better than most of the games Atari was putting out. So not only were the folks at Activision in new territory when it came to independent publishers, they also gave credit were credit was due. The programmers name was included right on the label. And there was usually a letter and picture from the programmer printed inside the manual. In addition, in what was probably the first example of Game Achievements (aka Gamerscore to the 360 set), most Activision games had a special patch you could get in the mail if you met certain requirements. You'd have to take a picture of the TV screen, send it in, and you'd get the patch and congratulatory letter from the programmer. Here's a full gallery of the patches from AtariAge. (as a side note I had a bunch of these when I was a kid, but somewhere in the course of growing-up I lost them. You can sometimes find them on eBay for about 10 bucks a piece, but very rarely do they include the letter.) Throughout the early 80's Activision continued to put out titles. Atari lost their lawsuit against Activision. They inspired Bill Grubb to leave Atari (taking several programmers with him) and start Imagic. At this point, there were few left at Atari of any real talent, and the entire videogame industry started a freefall decline. For alot of reasons, including this, the entire game industry would crash, dragging everyone down. Activision merged with Infocom, then ended up shutting it down. The company tried to move into other computer applications, changing the company name to Mediagenic. After it failed, the company closed up shop. The original Activision was gone. The name is still around, and while it never gained the level of popularity it had before the crash, the company puts out successful games. But it's really Activision in name only. So that's how it happened. Atari pissed off enough talented programmers to inspire numerous start-up companies. But Activision was the first. That's it for part 1. In part 2 we'll look at the specific games that made Activision famous. Until then you can tide yourself over with my full review of Kaboom! Sources: Wikipedia The Dot Eaters Steven Kent's the Ultimate History of Video Games Digital Press Classic Videogame guide My own wandering brain
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