turn by turn generally refers to the phone telling you the next step in your route as you approach it.
the way it is right now (iirc, they said they would add proper turn by turn in a future update [mango?!]) the phone will give you a route and track you, but you have to click the arrow to go to the next step on your own.
i hope that makes it a little more clear.
here's a video that should help a bit:
as for third party, i believe navigon has an app, but it's for a specific UK provider only right now, hopefully they release an app soon, because if (for me personally) they release it after msft updates their maps app, i'm not buying a third party one.