German telecom giant Deutsche Telekom (DT) is mulling over spinning off its U.S. arm, T-Mobile USA. Alternatively, the German operator may launch an initial public offering (IPO) for the US wireless unit, according to a Wall Street Journal report. Deutsche Telekom has negotiated with banks including Deutsche Bank (DB) to manage the IPO. A decision is expected in the next few months. However, company officials declined to comment on the issue.

With roughly 33.4 million customers, T-mobile USA is the fourth-largest carrier in the U.S. It has the distinction of being the first operator to adopt Google’s (GOOG) Android platform in the country, and is currently the sole carrier in the U.S. to offer the Internet giant’s Nexus One “superphone.” Moreover, T-Mobile USA has joined the high-speed hoopla in the U.S. as it recently upgraded its nationwide 3G mobile broadband network to the HSPA 7.2 standard.

However, T-mobile USA is contending in a consolidating industry and is struggling with upderperformance. Verizon (VZ) has emerged as the largest wireless carrier in the U.S. following its acquisition of Alltel Corp., while AT&T (T) acquired regional telecom operator Centennial Communications.

As such, T-Mobile USA is becoming increasingly isolated. Speculation was rife in 2009 that the carrier might merge with Sprint Nextel (S), but this has not materialized.

Due to their size and scale of operations, T-Mobile USA’s larger competitors are able to deliver services in a more cost-effective manner, which is affecting the company’s position in the market. Moreover, T-Mobile USA is also losing customers to smaller rivals such as prominent low-cost unlimited service providers MetroPCS Communications (PCS) and Leap Wireless (LEAP). Higher contract churn is affecting customer retention as T-Mobile USA has lost 77,000 customers in the third-quarter of 2009.

Deutsche Telekom has invested significantly on network infrastructure build-outs at T-Mobile USA Incorporatedluding the recent 3G network upgrade. The company’s stock performance has been lackluster as its shares dipped 16% this year. A potential spin-off of T-Mobile USA would help Deutsche Telekom to reward shareholders from the proceedings and enable it to lower exposure in the fiercely competitive U.S. wireless market.

On the other hand, an IPO would bring in the much-needed funds to support the 3G network expansion and deployment initiatives. Although T-Mobile USA’s 3G network has already covered a population of 200 million, it is still the smallest among the big four carriers in the U.S. in terms of coverage.

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