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The Tao of Yahoo!

U.S. Internet companies have been tripping over themselves to rush into China's Internet market, which is expected to surpass the U.S. in overall users in the next few years. However, most Chinese Internet users have spent the bulk of their time on online video games first, ecommerce second and Internet searches last. That's contrary to U.S. and European behavior, in which search has dominated.

Still, in the mad scramble of non-Chinese Internet companies to push into China, anything goes. So Yahoo!, which has shown a focus on Internet media (such as music, videos and financial data) as well as search, has abandoned that approach in favor of placing bets in China on a business that more closely resembles that of eBay's.

And eBay may, in the long run, prove most vulnerable to this deal. Depending on the data used, Alibaba's online-auction unit Taobao.com is either about to surpass or has already surpassed eBay's own consumer-to-consumer auction operations -- eBay's CEO Meg Whitman's multiple trips to China notwithstanding. eBay vowed to spend $300 million this year, largely on China and eBay's PayPal online payment subsidiary, to shore up its future business.

Alibaba also drew attention in the U.S. during eBay's vaunted seller jamboree, eBay Live, when the Chinese upstart set up a display in a nearby hotel and handed out free goodies to lure eBay sellers to its Chinese auction and online payment rivals. Yang downplayed the potential rivalry, but Alibaba CFO Joseph Tsai said Taobao.com had probably pushed past eBay in China.

"In the second quarter, Taobao had $200 million of gross merchandise value," Tsai said. "We think eBay's well below $200 million in gross merchandise value in the second quarter and that we're now over 50% and we've overtaken eBay in that market."

Tsai and Alibaba founder Jack Ma will be expected to fill the shoes of Zhou Hongyi, the founder of Chinese search site 3721, which Yahoo! bought in 2003. Under Yahoo!'s aegis, Hongyi quickly built his five-year-old search startup into China's second-largest search engine, after Baidu.com (BIDU - Get Report), which is minority owned by Yahoo!'s U.S. rival Google.

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