The choice of Los Angeles as the host city of the 1984 Olympics started the clock for a brief, bitter competition between the largest telephone company in the United States and its junior competitor.

The prize was the chance to install a remarkable new communications system beneath the Los Angeles streets to transmit Olympic television broadcasts and ordinary telephone conversations over glass fibers, using pulses of laser light blinking millions of times a second.

Fiber optics systems of this kind will be one of the hottest technological developments of the next decade, permitting a staggering growth in communications among homes, schools and offices equipped with computer terminals and data processors.

The chance to show off this new technology amid the televised hoopla of the Olympic Games was worth fighting for.

But the fight, between American Telephone & Telegraph Co. and its rival, General Telephone & Electronics Co., was over almost before it began. In a joint agreement last January, the two local Los Angeles telephone companies decided to buy nearly all of the optical fiber transmission system from AT&T's subsidiary, Western Electric Co. At this point, GTE will get virtually nothing.

It was bitter for GTE, one-fifth the size of the $52-billion-a-year AT&T. One of those local telephone companies is GTE's largest subsidiary, General Telephone of California. "We have lost a very substantial portion of our fiber optic market because we can't sell to AT&T and we can't sell to General Telephone," said David Foster, a GTE vice president for planning and marketing.

GTE claims that AT&T's triumph is a revealing example of how the size and muscle of the world's largest corporation gives it a critical advantage over smaller rivals--an advantage that GTE says hasn't been dealt with by the major communications bill passed by the Senate last month.

In addition to the Los Angeles project, an even larger network is under construction by AT&T in the Washington-New York-Boston corridor, covering 611 miles and costing at least $79 million.

AT&T says it didn't muscle GTE. It maintains it got the business because it is the current leader in a new, very fast-moving technology, and that's just the way it is. "I can understand their frustration," said Olga Mitchell, AT&T's manager for optical fiber development.

Both sides agree on the technical explanation for AT&T's win and GTE's loss.

Because General Telephone of California is surrounded by AT&T's local telephone network, any GTE equipment that transmits signals across the border between the two must be compatible with AT&T equipment.

Electronic compatibility is the essential issue. Simply put, it means that the devices on opposite ends of an optical fiber, flashing and receiving the pulses of laser light at fantastic speeds, must understand each other. However, every manufacturer of optical fiber transmitters, including AT&T and GTE, deliberately scramble the electronic signals before transmission over fiber cables, and none will disclose the codes they use.

"It's not to confuse. It's done for valid electronic reasons," says Carl Ebhardt, fiber optic manager of ITT Telecommunications, a competitor of both AT&T and GTE.

The result, though, is that an AT&T machine can't "talk" to a GTE machine, and an ITT black box can't understand one made by Nippon Electric Co.

That hasn't been a major competitive problem until now, industry officials say, since most optical fiber installations thus far have been small ones, contained within a local telephone company's system.

The Los Angeles project, however, requires widespread communications between two different local companies--General Telephone and AT&T's Pacific Telephone--and AT&T's subsidiary has insisted that any devices connected to the new system be compatible with AT&T Western Electric equipment.

Foster of GTE says his company could design its equipment to "talk" to Western Electric's if the AT&T subsidiary would reveal all of the electronic standards or design protocols it uses in its optical fiber transmitters.

AT&T has declined to divulge its "code" for this equipment, despite at least three direct requests from the rest of the industry, presented at meetings of the industry-wide association, the United States Independent Telephone Association, beginning in 1977. "There aren't any standards on optical fiber transmitters that have been agreed on by the industry," says Paul Fleming of USITA.

"The problem is this," contends Foster. "AT&T is the architect and planner of the nationwide public telephone switching network. They set the standards. The other independent manufacturers have to be compatible with Western Electric or they can't interface with the national network. Always on the other end of these things you're going to run into a Bell System operating company that is buying equipment from Western Electric.

"Our company and their company AT&T's Pacific Telephone had to agree on a single equipment manufacturer at both ends; the same guy," Foster said. "Guess who that happened to be?"

GTE, which installed one of the nation's first optical fiber systems in its network and has a Defense Department contract to design an optical fiber system for the MX missiles, could have prepared a competitive system for the Los Angeles network if it had known AT&T's technological standards in time.

AT&T's Mitchell says optical fiber technology is changing too rapidly for the company to stop and issue standards every step of the way. Optical transmission systems have gone through several "generations" since 1978, each one dramatically faster than the previous one. By the time one set of specifications was agreed to by AT&T and its competitors, it would be out of date, she said. "We recommend that our local operating companies purchase all of their equipment from one system manufacturer," she said.

To appreciate the difficulty of this task it is necessary to understand the complexity of optical fiber transmission, she added.

Since the early 1960s, scientists had searched for ways to use the power of lasers to transmit voice and video signals. They determined that it was possible to divide sound waves into millions of segments, measure the voltage in each segment, and convert that information into binary numbers--zeroes and ones.

Then in 1966, ITT scientist Charles Kao discovered that these binary numbers could be expressed and transmitted as pulses of infrared light, flashing millions of times a second, over ultra-pure glass fibers. The fibers, smaller than fishing line and just as flexible, could replace copper wires, vastly multiplying the message-carrying capacity of underground cables.

But making certain the high-speed messages are received clearly over this new medium remains a challenge, experts say. It could take years for Bell Labs to decide how to describe its system accurately to outsiders, said Mitchell.

"It's microprocessor talking to microprocessor saying, 'Yeah, I'm reading you. You look good. No. Stop. The error rate is too high. Switch to a different line.' It's a very complex handshake," says GTE's Foster. "But it's typical of what we go through every day."

GTE officials lobbied hard for language in the Senate communications bill that would require AT&T to share technological standards with all rival manufacturers at the same time it disclosed them to its affiliates--both the manufacturing arm and the local telephone companies. The provision was weakened, from GTE's viewpoint, in a last-minute change that was adopted by the Senate in a voice vote and apparently didn't get close scrutiny amid the larger issues in the telecommunications bill.

In AT&T's view, competition in optical fiber transmission will evolve as the technology evolves. The development of standards is progressing, said Mitchell. "We're getting somewhere."

But AT&T controls the pace, says Foster. "Why hold this back unless its for the purpose of getting a leg up on the competition," he asked.

"The nationwide public switch telephone network is rapidly becoming one large computer and if you're saying that one corporation can set the standards . . . you're really saying you can have only one equipment supplier, and the whole thing is a monopoly.

"So why are we deregulating?"