The American Internet companies also have local competition in the Middle Kingdom. Baidu.com for example is the largest search company in China, followed by Google, Yahoo and China-based Sohu.com. Sina is the largest portal site in China and has a deal with Yahoo for an online auction house. Yahoo China president Zhou Hongyi resigned last month for personal reasons, leaving the future of the portal's unit in question.
Sullivan also said Google may be losing ground in China to Baidu.com, citing research from one outlet overseas that claims Baidu.com commands roughly 30 percent of the marketplace and Google has 25 percent.
Of all the major American Internet companies, MSN has the smallest presence, Rashtchy said, but its IM client is second only to China's Tencent in the Chinese workplace.
Because China is such a fast-moving and populated marketplace, analysts say U.S. companies must establish a significant presence in the country if they want to thrive there. According to China's People Daily Online, Google was once the dominant search engine in China, but it lost market share to Baidu.com because it wasn't focused enough on the local market.
"For Google, the whole idea is that they can't do everything from Silicon Valley if they are a global outfit. To them, China is a big market, but they must develop features from China," said Rashtchy.The search companies aren't the only tech-savvy Americans racing into China, of course. On Tuesday, Silicon Valley venture capitalist Accel Partners said it partnered with the media company International Data Group to form a US$250 million fund to invest in Chinese tech companies. Others, including Intel, have established similar funds to take advantage of China's booming technology, gaming, broadband and cellular markets.
Meanwhile, a growing number of Chinese companies have gone public on U.S. exchanges in the past two years, some with strong results. Shanda Interactive, a gaming company, has seen its stock go from US$11 per share at its initial public offering in May 2004 to more than US$39, a return that's on par with Google's.
But clearly, Google is Microsoft's toughest competitor when it comes to hiring top engineers and perhaps the biggest threat in years to the Redmond, Wash., company's tech domination. And the toughest fights to come may take place on the other side of the world from the companies' headquarters.
"It's almost like the United States and the former Soviet Union launching missiles at each other," said Sullivan, "and Yahoo's like Canada."
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