It’s good to have Paris Hilton and Snoop Dogg on your side, especially if you’re an outsider in the cutthroat U.S. wireless market. T-Mobile USA—a subsidiary of Germany’s Deutsche Telekom—has proven that.

T-Mobile USA is the only foreign mobile operator to have ever successfully established its brand in the United States. Celebrities and wannabes alike carry around the distinctive Sidekick II phones, and the company is betting its numbers will increase after an October 18 star-studded launch party in Los Angeles for a new limited series—a pink Juicy Couture version and a black “Mr. Cartoon” Sidekick, named for the tattoo artist who has etched his artwork on the bodies of Eminem, Justin Timberlake, and Missy Elliott.

The company has so successfully infiltrated the U.S. market that few of its hip American customers would even dream that it is anything but American. Of all the mobile operators in the U.S., analysts say T-Mobile USA is the fastest-growing. It is attracting a greater percentage of 13- to 34-year-old consumers than many of its competitors, helping it boost its average revenue per user (ARPU) with services like games and ring tones, which appeal to younger consumers.

T-Mobile USA is also credited for being innovative and early with services like photo messaging and instant messaging, says Seamus McAteer, a senior analyst at M:Metrics, a Seattle-based company that measures mobile content. The company is now preparing to spend billions to buoy its U.S. operations.

Yet despite becoming a household name in the U.S., and the fact that T-Mobile USA has become Deutsche Telekom’s fastest-growing unit—overtaking its domestic mobile phone operator in business revenue—questions remain about where its U.S. operations will lead. The company faces the same issues as other mobile operators around the globe: no one knows what—if anything—will drive mobile data traffic in the future, and everyone knows that VoIP over cell phones threatens to significantly eat into traditional voice traffic, which today represents the biggest source of revenue.

Other European operators, such as Telecom Italia, Spain’s Telefonica, and Norway’s Telenor, are placing bets on high-growth emerging markets. Meanwhile, T-Mobile International, the holding company for operators serving more than 80 million customers, is concentrating on only two regions: Europe (in its home country and in markets that are either saturated or relatively small), and the U.S. (where it is No. 4 and has little hope of climbing further up the ladder, according to analysts).

Rene Obermann, T-Mobile International’s 42-year-old chief executive and chairman of the board, downplays the challenges ahead. “We don’t consider ourselves to be the fourth-largest player in the U.S., but the third-largest international mobile operator on the globe,” he says.

But T-Mobile USA—the jewel in T-Mobile International’s network—remains as controversial as ever. The core of the company was formed by Deutsche Telekom’s €33-billion ($40-billion) purchase of VoiceStream in 2000, then the U.S.’ sixth-largest cellular operator. The acquisition nearly brought Deutsche Telekom to its knees.

VoiceStream—the largest and most controversial purchase made during an acquisition spree that began when then-CEO Ron Sommer took the former state-run monopoly public in 1996—helped Deutsche Telecom rack up €67 billion in debt and caused its stock price to plunge 90 percent. Mr. Sommer rigorously defended his strategy, arguing that transforming a bloated century-old government ministry into a global communications firm required taking sizable risks.

That may be so, but Mr. Sommer’s spending spree led not only to his 2002 resignation but also to a drumbeat of protest from the public and politicians, ratcheting up pressure for Deutsche Telekom to sell off its U.S. mobile operations. The German operator resisted.

Fast-forward to October 2005. T-Mobile USA’s customer base has grown to 20 million, but consolidation in the U.S. market and the parent company’s debt—now at €42.7 billion—again raise the question of whether it makes sense for T-Mobile International to hang on to its U.S. operations. Newspapers around the world report that T-Mobile USA is for sale; the company squelched the rumors last month.

The U.S. operation—which in 2004 contributed €9.36 billion in revenue, or 37 percent of T-Mobile International’s total revenue—“is not for sale and I am very happy about that,” says Mr. Obermann, an entrepreneur who sold a telecom business he started to mobile operator Hutchison Mobilfunk in 1991, then went on to become chairman of that company’s management board before joining T-Mobile International.

In fact, going forward, Mr. Obermann says he sees the biggest growth coming from the U.S. and Western and Central Europe. But “the U.S. will require continued investment to further develop and sustain it,” he admits.

To that end, T-Mobile USA announced in September that it will bid for a U.S. third-generation (3G) mobile broadband license—at an estimated cost of around $10 billion—and spend an additional unspecified amount to build new network infrastructure and begin offering 3G service by 2007, a strategy that analysts believe is fraught with risk.

There are no current plans for T-Mobile International, the first to operate a transatlantic network based on the Global System for Mobile Communications (GSM) technology that is standard in most of the world, to expand into high-growth mobile markets in Asia, Latin America, or Russia, says Mr. Obermann.

That will limit how much the company can grow, says Martin Gutberlet, the Munich-based director of the global mobile sector for technology consultancy Gartner.

He says that in Germany, Europe’s biggest mobile market, T-Mobile may be No. 1 in terms of connections but Vodafone is a very close second. T-Mobile International has no presence in Italy (Europe’s second-largest market), is losing market share in the United Kingdom (the third-largest market), and is not present in France or Spain (the fourth- and fifth-largest European mobile markets, respectively).

The other 10 European markets where T-Mobile International competes—countries like the Czech Republic and Austria—have a combined customer base of about 28 million, roughly the same number that the company has in its home market of Germany.

“The entire growth story relies on T-Mobile USA, which is not playing a leading role in the U.S.,” says Mr. Gutberlet. Putting all of its eggs into the U.S. market, when T-Mobile International is starting from behind, “is not enough if you aim to be a leading global player in the mobile business,” he says.

From Bonn to Paris

Bonn-based T-Mobile International may be facing some important challenges, but establishing its brand in the U.S. is not one of them. The T-Mobile global brand made its debut in the U.S. in July 2002 and it didn’t take long for it to become a household name, say analysts.

“They have an image of a cool company that targets, among other things, a young audience with the newest, latest, greatest, fun devices,” says Julie Ask, a research director and senior analyst in the San Francisco office of JupiterResearch.

Around 45 percent of T-Mobile USA’s customers are between the ages of 13 and 34. So the U.S. unit, based in Bellevue, Washington, organizes parties with celebrity guests who appeal to the target age group for the launch of each version of the Sidekick phone, which opens like a clamshell and features a full keyboard for emailing and instant messaging. These devices have been eagerly adopted by movie stars, hip hop artists, and sports figures, creating a buzz.

Of course, being linked to celebrities can also bring unwanted attention. In February, hackers duped a T-Mobile employee into giving them information that led them to guess the password of Paris Hilton’s digital address book stored in her Sidekick II. That resulted in the posting of the names and numbers of some of her celebrity friends—including Christina Aguilera, Vin Diesel, and Ashlee Simpson—on the Internet. The incident made headlines for days.

“Yes, it reflected badly on T-Mobile, primarily due to its security and the way that the breach occurred, but by and large it was still net-positive because what the average public took away was this association with Paris Hilton and her Sidekick,” says Charles Golvin, a principal analyst in the San Francisco office of Forrester Research.

At the same time that it has cultivated a hip image, T-Mobile USA has also successfully courted families through its “Get More” campaign. The ads feature actress Catherine Zeta-Jones and emphasize the fact that T-Mobile USA offers more minutes, more features, and more services than competitors.

The company is also trying to differentiate itself by offering a better quality of customer service to its subscriber base of consumers and home office customers. Mr. Obermann says the strategy appears to be working, pointing to the fact that T-Mobile USA recently ranked highest in overall customer satisfaction with wireless retail service in the J.D. Power and Associates’ U.S. 2005 wireless retail satisfaction performance study. It also earned highest honors in the same study last year.

It is little wonder, then, he says, that “in the U.S. we keep adding market share—we are growing three times faster than the market.” Still, the sea change that occurred in the U.S. market in 2004 makes it difficult for T-Mobile USA to catch up to its rivals.

Where there were once six major operators, each with less than 25 percent of the market, there are now only four, which together have over 80 percent of the U.S. mobile market.

The No. 1 U.S. mobile operator is Cingular Wireless, which in 2004 absorbed AT&T Wireless and now has51.6 million subscribers; No. 2 is Verizon Wireless with 47.4 million subscribers; and in third place is Sprint Nextel, the company that grew out of the 2004 merger between Sprint PCS and Nextel Communications, which now has roughly 42.7 million subscribers. T-Mobile USA is a distant fourth with 20 million subscribers.

“There is such a big gap that there is very little chance for them to climb up to No. 3 in the U.S,” says Gartner’s Mr. Gutberlet.

It is not a question of coverage: T-Mobile USA’s operations, which have the capability to provide services to 95 percent of the U.S. population, are based on two networks, those of VoiceStream and PowerTel. The two companies merged in 2000, the same year that Deutsche Telekom bought the operation.

But bandwidth and spectrum are issues, particularly with demand expected to increase for mobile data services such as providing access to email, the Internet, text messaging, ring tones, and photo messaging.

T-Mobile USA is scheduled to finish the rollout of EDGE, a technology in between the current second-generation and the future 3G network, by year’s end. That technology works fine for most data services, but does not solve the company’s spectrum problems, says M:Metrics’ Mr. McAteer. Being later than competitors to offer 3G services means that T-Mobile USA “will be challenged to compete for landline replacement business and to offer plans with larger buckets of voice [time],” he says.

Limited ad spectrum hasn’t hurt T-Mobile USA to date, although analysts predict it will in the future. The company has successfully pushed Blackberry email services on mobile data devices and it is attracting a greater number of downloads of ring tones and mobile games than some of its competitors. For example, 22 percent of T-Mobile USA customers have paid to download at least one ring tone in the past six months, compared with 11 percent of Verizon customers, according to a JupiterResearch report.

T-Mobile USA also does well when mobile data is measured as a percentage of total ARPU. Some 8.2 percent of its ARPU comes from mobile data, slightly more than both Verizon and Cingular but less than Sprint’s 13 percent, according to JupiterResearch figures.

So T-Mobile USA is waiting before upgrading to faster networks, even though rivals like Verizon have already launched high-speed broadband networks, offering services such as one that streams live TV to mobile phones.

Hamid Akhavan, T-Mobile International’s chief technology officer, says he isn’t worried. “I don’t feel we are at a disadvantage because we have a leadership position in Wi-Fi and that is what matters most to users right now,” he says.

T-Mobile USA has 20,000 hotspots across the world and has marketed the wireless service heavily in the U.S. through outlets like Starbucks. But analysts say those hot spots have not been a large factor in attracting business customers in the U.S. And they warn that it is not certain that T-Mobile USA will get enough spectrum during the 3G bidding process to allow it to effectively compete on mobile data services in the future.

Spectrum “is like hard-disk space, you can never have too much,” says Forrester’s Mr. Golvin. “The question is how much can they get—can they get the adequate allotment in all the markets that matter most to them?” he asks. “I am not sure there will be giant swaths of spectrum with plenty to go around to all the operators, so I doubt this will alleviate all their constraints.”

Sue Swenson, T-Mobile USA’s chief operating officer, agrees the road ahead will be challenging. But, she says, “I am not sure it will be as tough as categorized.”

The company will have to get creative and make the best use of its assets, she says, adding that the announcement of its bid for a 3G license is a sign “of the commitment we are making to the U.S.”

Analysts say that strategy is just too risky, as T-Mobile USA can’t be sure it will be awarded the needed amount of spectrum. It needs to spend billions to upgrade its network for the consumer market, where demand for data services is uncertain and data tariffs are expected to fall first.

Experts also privately speculate that the real reason T-Mobile USA was taken off the market was that it couldn’t find a buyer at the right price and that the announcement that it will bid for a 3G license is a bluff or an option of last resort. One scenario sees Cingular buying T-Mobile USA in about a year, after it has had time to digest the AT&T Wireless merger. Other analysts say U.S. cable operator Comcast or Japan’s NTT DoCoMo might buy the U.S. unit. Armed with billions in cash from the sale, Deutsche Telekom might then pull out of the U.S. market and buy a major incumbent operator in Europe, such as Telecom Italia or Spain’s Telefonica.

European Challenges

In Europe, spectrum isn’t an issue: T-Mobile International has already rolled out 3G networks in a number of countries and is planning to introduce it in others. It has other headaches to deal with.

In England, it is the only operator that is losing customers and it is not clear how it is going to bulk up. In August, Deutsche Telekom scrapped a plan to bid—in partnership with Dutch fixed operator KPN—for British mobile operator 02, which has a market value of about $24 billion. If it doesn’t buy another operator, analysts predict it will continue to have a tough time in this intensely competitive market.

In the Netherlands, T-Mobile International has 2.2 million customers but competition has gotten tougher since Dutch incumbent KPN took over Telfort, the No. 3 operator.

In August, T-Mobile International bought Tele.ring, Austria’s fourth-largest mobile operator, for €1.3 billion. The company is merging Tele.ring with its own Austrian operations, but together they have a No. 2 market position in a small market, according to Gartner. Competition is also increasing in the Czech Republic, where T-Mobile International has 4.4 million customers. And in Poland, the company is locked into a legal battle with French media Group Vivendi over who owns Poland’s biggest mobile phone operator, PTC. “We have to come to an agreement, the situation is not good for business,” says Mr. Obermann.

Against this tough backdrop, Mr. Obermann says his goal in Europe is to become the most “highly regarded” service company. “There is a land grab going on in the mobile sector and we have to differentiate ourselves and that differentiation is on service,” he says. “That is the challenge.”

Another test is trying to figure out the right mix of content that will drive consumers to use mobile data. Analysts say T-Mobile International’s T-Zones portal, which was pitched as an easy-to-use front end to the company’s mobile services, is an expensive flop.

Although it is still possible to download ring tones and other services from T-Zones, it is no longer the interface with the consumer. Since June, Google has popped up on the home page, a move that Mr. Obermann defends by saying that it makes it easier for the customer to surf the Internet freely.

But the German operator has not stopped experimenting in its search for content that will drive business in the future. Last summer, British pop star Robbie Williams and T-Mobile International signed a deal that will allow customers to download songs, exclusive live tracks, and concert footage to their mobile phones.

What is interesting, given the music industry’s reluctance to change its existing business models, is that T-Mobile International officials say Mr. Williams actually came to them.

The pop star kicked off a concert tour to promote his new album on October 9 in Berlin. The partnership enabled users to download the video clips to the songs “Tripping” and “Make Me Pure” before they were even shown on television. In addition, the Berlin concert was video-streamed live, free of charge to T-Mobile International’s customers in Germany and Austria and broadcast to cinemas in 23 venues in 11 countries.

The 18-month deal, which also incorporates mobile devices from SonyEricsson that come with embedded Robbie Williams content and the offer of a free download, is one of the biggest tie-ups yet between a big artist and a phone company, and will be watched with interest by, among others, T-Mobile USA. “We have the advantage of looking to our European colleagues to see what are the 3G applications customers really want,” says Ms. Swenson.

You are Here Now

Analysts question just how much synergy there is between T-Mobile International’s various units. But the company insists there is plenty when it comes to both technology and to management.

Among T-Mobile International’s key differentiators is the alignment of its product roadmap and the fact that it “acts as one company with global integration of management at the international level,” says CTO Mr. Akhavan.

Not only that, he says, the company’s top management are close friends. So close that CEO Mr. Obermann and Timotheus Hoetttges, T-Mobile International’s head of sales and service operation in Europe, bought adjoining houses and take their families on vacation together. Mr. Obermann and Mr. Akhavan like to play music together: Mr. Akhavan plays the flamenco guitar, Mr. Obermann the drums, says Mr. Akhavan.

However, the atmosphere at T-Mobile International’s headquarters is all business.

The room leading to Mr. Obermann’s office, a glass tower with a direct view of many of his employees’ work spaces, displays a small sign reminding employees to stop sneaking looks at email on their mobile data devices while in meetings with management. The sign says simply, “You are here now”—a good starting point for discussions that in all likelihood will increasingly center on where the company and its U.S. operations need to go from here.