SK Telecom Co., South Korea's largest mobile-phone operator, posted profit that fell more than analysts estimated after the company boosted promotional spending to keep customers from defecting to KT Freetel Co. and LG Telecom Ltd.

Second-quarter net income dropped 26 percent to 298 billion won ($295 million), from 403.3 billion won a year earlier, the Seoul-based carrier said today. Profit lagged behind the 332.3 billion won median estimate of 11 analysts surveyed by Bloomberg.

Competition in South Korea, where nine out of 10 people already own a mobile phone, forced operators to spend more on promotions and subsidies to lure customers. Korean wireless companies spent 31 percent of their phone revenue on marketing expenses, the highest level since 2002, last quarter, according to estimates at Seoul-based Korea Investment & Securities Co.

``If operators continue to spend like this, it won't benefit anybody,'' Song Jae Kyoung, an analyst at Eugene Investment & Securities Co., said by telephone today. ``Hopefully, competition should ease toward the end of the year as it becomes more difficult to take away users from each other.''

SK Telecom fell 0.5 percent to 183,500 won at 2:07 p.m. on the Korea Exchange, after rising as much as 1.1 percent before reporting the results. The benchmark Kospi index gained 2.1 percent.

Marketing costs, which include expenses for subsidizing handsets, rose 25 percent to 876 billion won. Analysts in the survey projected the costs at 874 billion won.

Competition Heats Up

``The level of market competition in the first half of 2008 was higher than ever before,'' SK Telecom Chief Financial Officer Lee Kyou Bin, said in a statement today. ``We still expect uncertainties in the second half as well.''

Operating profit, or sales minus the cost of goods sold and administrative expenses, fell 20 percent to 533 billion won, while revenue rose 3.1 percent to 2.93 trillion won. The company was expected to report operating profit of 562 billion won and sales of 2.95 trillion won, according to the analyst survey.

SK Telecom is the first among South Korea's three wireless operators to report results for the latest quarter. KT Freetel, South Korea's second-largest mobile-phone operator, will announce earnings tomorrow and LG Telecom on July 29.

SK Telecom's share of the Korean mobile-phone market was little changed at 50.6 percent at the end of June, compared with 50.5 percent a year earlier, according to government data. KT Freetel had 31.5 percent, and LG Telecom controlled 18 percent.

Slower Growth

South Korea's mobile-phone subscriber growth in June rose 6.3 percent, the slowest pace since April 2007, according to the Korea Communications Commission.

SK Telecom is seeking to expand in overseas markets including China and the U.S. to counter slowing growth in Korea's mobile-phone market.

The company last month agreed to sell its Helio joint venture to Virgin Mobile USA Inc., Richard Branson's pay-as-you go mobile-phone provider, for about $39 million. SK Telecom will own about 17 percent of Virgin Mobile USA and take two seats on the board after the transaction closes.

In September, SK Telecom converted $1 billion of bonds in China Unicom Ltd., the country's second-largest mobile-phone operator, to a 6.6 percent stake.

SK Telecom in March acquired a 39 percent stake in Hanarotelecom Inc., South Korea's second-largest provider of high-speed Internet connections, giving the company access to a quarter of that market.

Source:Bloomberg