Amazon (AMZN +0.86%) recently launched the Fire TV Stick, a streaming media dongle that closely resembles Google's (GOOG 1.23%) (GOOGL 1.23%) Chromecast. The device offers the same media streaming and game-playing abilities as Amazon's Fire TV set-top box, and costs $39, compared to the $99 Fire TV and $35 Chromecast.

Launching a cheap media stick certainly makes sense given the rising popularity of Chromecast, Roku, and Apple (AAPL +0.74%) TV, but is it too late to enter this saturated market?

Source: Amazon.

How the Fire TV Stick scorches the competition
At first glance, the Fire TV Stick crushes the Chromecast across the board, which certainly makes it worth an extra $4.

Source: Company and industry websites.

In addition to challenging Google, Amazon is also taking on Roku and Apple. Roku sells a streaming stick for $50, while its set-top boxes cost between $50 and $100. Apple TV, like Amazon's Fire TV, costs $99.

But stealing market share isn't Amazon's primary goal. The real aim is to tether more living rooms to Amazon's ecosystem with dongles and set-top boxes. That would fuel growth in Prime memberships, which would boost customer dependence on Amazon's product searches and media consumption services.

Amazon Prime members who pay $99 per year get free two-day shipping, unlimited video and music streaming of select content, and a free e-book rental every month. Therefore, a Fire TV Stick buyer will likely become a Prime member to access more media content. That would encourage him or her to buy more products on Amazon.com or buy a Kindle to read free e-books.

That combination package is highly appealing -- that's why Prime's user base soared from 20 million confirmed members in January to about 50 million estimated members (per RBC Capital) in September. RBC Capital also recently revealed that Prime members spend an average of $538 per year on Amazon -- 68% more than nonsubscribers. To encourage more customers to subscribe to Prime, Amazon slashed the price of the Fire TV Stick to $19 for the first two days for Prime members, and included a free one month trial of Prime for nonmembers.

The problems with that plan
According to NPD Group, Apple controlled 39% of the streaming video player market during the second quarter, compared to Roku's 28% and Chromecast's 16%. The remainder of that market remains fragmented among smaller players. One of those players is Fire TV, which hasn't been reliably tracked yet. 

However, NPD's report reveals that Roku is the actual market leader in terms of total video streamed. Roku users surveyed streamed an aggregate of 37 million hours weekly, compared to 15 million hours on Apple TV, 12 million hours on Chromecast, and 6 million hours on the Fire TV.

Source: Amazon.

While it's unclear just which company is actually on top, it's clear that Amazon has carved out a small niche in this competitive market with the Fire TV. That's why it doesn't make sense to abruptly cannibalize it with the Fire TV Stick, since the set-top Fire TV's only advantage is that it has more horsepower to play more GPU-intensive games. Tepid demand for Android mini-consoles like the Ouya shows us that isn't a strong selling point.

Channel margins aside, Amazon was selling the Fire TV at a small profit per unit, since Teardown.com estimated that the Fire TV costs $93 to manufacture. By comparison, IHS estimated that Google's Chromecast carries a bill of materials of $25.60. Since it would have been tough for Amazon to offer a better CPU, more RAM, more storage, and dual antennas in the Fire TV Stick for $10 more, Amazon will likely sell the Fire TV Stick at a loss.

In my opinion, it would make more sense to launch a second-generation, smaller Fire TV with cheaper components instead of fragmenting and cannibalizing its user base with the Fire TV Stick.

The road ahead
The Fire TV Stick probably won't die out like the Fire Phone, which caused Amazon to take a $170 million writedown last quarter, but it also won't be the next Kindle. The problem is that many consumers and investors forget that streaming media devices are merely temporary, transitional devices that offer features being found on more and more smart TVs.

Just as Kindle books can now be read on most non-Amazon tablets via an app, Amazon in the future will rely more on Prime media apps on smart TVs than dongles or set-top boxes. For now, the Fire TV Stick is a crutch to help Amazon make that transition, but I doubt that either the Fire TV or Fire TV Stick will be relevant in a few years time.