FOR the thrill of the unexpected, investors need look no further than the telecommunications sector. Here is an industry that will obviously play a central role in the future of the planet, making our communications faster, more adaptable and more mobile than we ever thought possible. But precisely how technology will fashion the digital age, no one can say for sure. There will be winners, losers, and companies that simply muddle through.

In the euro zone, the European Union has already fired the starting gun; not only are the giant, state-owned telecommunications companies now obliged to compete with new rivals, but they are themselves being privatised and floated on the stock exchange. This has led to a series of alliances and mergers, and these are likely to increase.

When it comes to potential for growth, most analysts say, telecoms represent an almost unlimited upside. Until relatively recently, telecommunications meant voice telephone calls, telexes, telegrams and not much else. In most countries the companies providing these services were owned by the state, operated in a jealously-guarded monopoly, and charged pretty much whatever they liked. Potential for growth merely meant gangs of engineers going to developing countries to lay copper wires and install switching systems.

Now, the same careful customers from a decade ago have seen the price of calls drop significantly, and they have responded by making more calls than ever. Their offices have fax machines. Many now carry mobile phones, further boosting the volume of calls. But far more significant than the increase in the number of calls is the volume of data zipping down along the world's fibre-optic telephone lines.

Analysts say data - digital signals sent between computers - is what will drive the telecommunications industry to even greater than heights in the next century. As electronic commerce takes hold, as the choice in home entertainment becomes vast and instant, as live video communication between homes and offices becomes routine, as the next generation of information-focused mobile phones kicks in, so the demand for fast data lines will soar.

Elephantine privatisation and investment programmes, rapid technological change, and acquisition activity add up to a sector no savvy investor should rule out.

"When you look at telecoms, you have three choices when you go to invest," says Ms Jemma Houlihan, who analyses the sector for ABN-AMRO. "You have the incumbent operators - such as Telecom Eireann, France Telecom, Deutsche Telekom - and they would be defensive plays. You have cellular companies, which are growing fast and have phenomenal growth potential, and you have new entrants, which offer higher reward but are higher risk."

At Davy stockbrokers, analyst Mr Scott Rankin says telecoms in general have run well ahead of the market in the last year, and are still seen as a solid bet. There are a number of reasons for this, he says, including that the industry is perceived as having better growth potential than many others, and the rapidly increasing penetration of cellular phone use.

He also suggests that investors in some companies can expect an occasional boost through mergers and acquisitions, as larger firms gobble up smaller ones.

At Merrill Lynch, telecoms analyst Mr Jo Oliver agrees, and says he expects to see consolidation emerge this year as a more significant feature of the sector.

"There is going to be a lot of consolidation - there is a huge amount of logic for that to happen, both financial and commercial. The pace seems to be accelerating, the stakes are being raised," he says.

This trend would suggest that for many of Europe's smaller telecoms, including perhaps Telecom Eireann, the future lies as part of a larger organisation.

"What you need in this game is scope, scale and reach. Capital is limited no matter what industry you are in, and the smaller you are the less ability you have to gear yourselves up and gain capital from the capital markets - especially not from a debt perspective where your balance sheet is just not large enough to support gearing beyond a certain point," Mr Oliver adds. "So if you are in a geographic region, or you have expertise in a certain segment of the market, then you become potentially strategically valuable."

Mr Rankin says competition is also driving the trend: "It's all really about scale. The cost of long-distance calls are dropping dramatically around the world, so most incumbent telecommunications companies would be under pressure on revenue lines. So what they are trying to do is build scale, build worldwide networks and reduce their cost base."

He adds that while 18 months ago there was a common view that the maximum penetration level for mobile phones was around 50 per cent of the population, now there is a perception that levels could reach 100 per cent, where people have a mobile line for the office and another for personal use.

"But quite apart from the number of handsets, I think everybody expects quite a lot of traffic on fixed-line networks to migrate to mobile networks. So from a traffic and a revenue perspective, I think people see there's an awful lot more growth in mobiles," Mr Rankin adds.

Many of the telecoms also own mobile companies - examples include France Telecom, Telecom Italia and Telecom Eireann. These will benefit either from the growth in mobile traffic, or, if they are forced by regulators to sell the cellular offshoots, the cash injection from the sales.

More competition in the market will come from the cable industry, who are already beginning to offer telephone services to their traditional television customers. Cable firms also have the capacity to siphon off some of the data traffic telecoms expect to carry for home entertainment and Internet use.

So what should investors look for in a euro zone telecommunications company?

Mr Oliver says that in a changing environment, quality management is key: "You are looking for companies that show a visionary culture, which have got important strategic assets, which are exposed to the growth areas - essentially data and cellular - and which have management proactive rather than reactive."