Here's One Theory For Why Samsung Profits Are Getting Demolished

Earnings are down 49% from a year ago as the company struggles to compete against other high quality smartphones that sell in emerging markets for a lot less. Meanwhile, its new product categories like the six smartwatch models it has released in the last 13 months have failed to take off.

But there's another piece to the puzzle.

Part of the reason why scrappy startups like Chinese smartphone makers OnePlus and Xiaomi are able sell their phones at rock-bottom prices and eat into Samsung's sales is because they spend little on marketing and sell directly to consumers through the web.

These companies rely mostly on social media and word of mouth to market their products. And it works. For example, Xiaomi sells more phones in China than both Apple and Samsung. OnePlus, which has only sold its smartphone in limited preorders, has sold at least 500,000 phones, with thousands clamoring for an opportunity to buy more.

But it's probably not a model Samsung will be able to follow any time soon.

Carl Pei, a cofounder at OnePlus and the company's global director, said Samsung's marketing costs and protection of its margins make that nearly impossible.

"They spend the money on channel costs and marketing," Pei said in an interview with Business Insider. "They're not going to be able to do it if they sell it in stores because retail margins eat up maybe 25 to 30% of your price. You then have to look at the component cost and then marketing on top of that."

So it's not like Samsung can turn around tomorrow and start selling Galaxy phones at the same scale for the same prices its cheaper rivals do.

Still, that presents a challenge for startups like OnePlus. If it wants to reach massive scale and still sell phones at a discount, it has to change buyers' habits.

"We're at a disadvantage to reach mainstream consumers when not in stores," Pei said. "Our bet is in three to five years people will start learning how to buy phones online."