Mostly every developer that isnt huge like EA, or Ubisoft release a project every two years.
How does Valve make its money when they've released 2 and a half games since 1996-97. Yeah, they've released retail projects like CS, DOD, but they were also free mods at the same time.
What about Irrational Games (oopps, I meant 2k Boston/Australia), they just released Bioshock.
They do make money. Rare is also owned by MS, so MS is making the money, well Rare, I assume gets a certian percentage of the sales, and the money they got from the buyout.