If it was not due to the quality then why in your opinion did they stop buying 3pp?
I can only speak for my own experience but here are the reasons I spent less (didn't stop buying) 3PP content. Note: 3rd-party products are what brought me back to D&D (3.5). While I had picked up 3.0, I never played it.
1. General economic pressures. The economy started going sour and in a competitive technology job, it was time to tighten the belt and build up the f-u fund. I couldn't tell my family to cut expenses and then continue to support my RPG hobby at the same rate.
2. More discerning tastes. By this time, I'd narrowed down my list of go-to publishers. WotC didn't make the list as I became increasingly disillusioned with each successive 3.5 splatbook. In some cases, it was a matter of choosing a particular product from similar offerings by different publishers. In others, it was simply a matter of "what will I use in my game more often?".
3. Less new material offered. There was the glut, the near-certainty of 4e, the once-burned/twice-shy effect that 3.5 had, and no clear picture of whether an OGL would exist. The larger and/or wiser 3PPs made business plans to adapt, smaller and/or less-wise ones didn't and suffered for it.
Ultimately, as a consumer, I became choosier about my purchases for a combination of reasons. However, I was still buying 3rd-party products. Coincidentally, the reviews by Crothian and Joe Kushner became one of my primary methods for vetting/prioritizing those 3PP purchases.
In the end, the reasons for declining sales of 3.5 & 3PP products have no single smoking gun.
I think the sad reality is that most publishers (WotC included) developed business plans that assumed a higher sustained level of sales than materialized. Was the glut the reason for the decline in sales? It certaintly was a component but it's unlikely it was the only reason - economics are seldom so simple. Was quality the reason for the decline? I'll stack any Green Ronin d20/OGL supplement in my library against WotC 3e product. Against the core rulebooks, it's close. Against the later 3.5 splats - no contest. GR's books win hands down.
The 3PP market for 4e is tiny by comparison. Certainly, the dearth (i.e. greatly diminished count compared to 3/3.5) of 3rd-party product has not translated into a 1:1 uptick in WotC sales or growth in other RPG games.
To use the technology cycle as an example, the end of 3.5 is analagous to commoditization of a product - what once brought a premium no longer could do so. As with any industry, developing one's business plan in sync with that cycle is crucial. Do it well, you usually see sustained growth. Do it less well, and you will have declines or peaks-n-troughs along the way. Also, today's partner is tomorrow's competitor. It happens, people.
Being RPG enthusiasts, we think in terms of the hobby first (as we should) yet that's dangerous for a company. The companies have to think in terms of profit & sustainability (as they should - employees paychecks depend on it).
WotC chose to reinvent its business plan with a new edition, tight control of electronic content for that edition, and a greatly pared down 3PP environment. They gambled that the significant change in their business plan would net them more customers than they lost. By purely anecdotal evidence, it was a successful business plan. However, by equally anecdotal evidence, it has no produced the same level of sales as 3.0/3.5. It also created a significant rift in the D&D community over what it had in the heyday of 3e. As ENWorld frequently highlights, one can argue if the success achieved by 4e was greater than, less than, or equal to the business plans' targets.
Green Ronin, Mongoose, and Fantasy Flight Games unhitched their wagons from the OGL to pursue other RPGs and lines of business. As to whether they are growing, declining, or holding steady, I can't say.
Paizo rolled the dice and (by equally anecdotal accounts) succeeded beyond their best-case scenario.
Necromancer took a wait-and-see approach - because they were small enough to be able to do so. Necromancer games wasn't (to my understanding) anyone's primary source of income.
The only thing consistent amongst those examples is that they each have different, and in some cases wildly different, business plans.
Ultimately, it's business. Labors of love for many, but without operating capital, it reverts to being just a hobby.
As for me? WotC gets $0 of my gaming budget. No malice, just fact.
Paizo = 70%
PF-compatible products = 20%
Other 3PP = 10%
I'm still a 3PP-fan. Here's hoping Necromancer has great success with PF-compatible products.
