Microsoft Putting All Its Chi in China

What happens when the world's largest software company enters one of the world's largest technology markets?

So far, not a whole lot.

Amid the recent buzz over China -- whether it's Baidu's (BIDU Quote) stratospheric IPO or Yahoo!'s(YHOO Quote) billion-dollar deal with Alibaba -- Microsoft(MSFT Quote) has remained a bit player there, its name tossed out as just another company trying to get a toehold in the massive market.

Piracy has prevented the tech behemoth from generating substantial software sales in China, and the theft does not appear to be abating anytime soon. While Microsoft has enjoyed some modest success there on the Internet -- its Messenger service has nabbed a solid No. 2 position in the country, trailing only Chinese firm Tencent's QQ brand -- it may take several years for the company to develop this into a thriving business.

Unlike in the U.S., where its flagship Windows and Office brands are cash cows, Microsoft initially may have a bigger opportunity on the Internet and in mobile phones in China than in software. A few statistics bear this out:

The Internet population in China is roughly 100 million and is on track to exceed the U.S. population in five to seven years, estimates senior analyst Safa Rashtchy, who covers Internet and China for Piper Jaffray.

The handset market in China sits at a whopping 350 million users, according to Beijing-based technology advisory and research firm Analysys International. That's about 40% more users than the U.S. market.

Meanwhile, the installed base of PC users in China is only 60 million and growing at less than 20% a year, according to Analysys. And about 90% of software on those PCs is pirated. (By comparison, the U.S. market is estimated to have a piracy rate of about 22%, according to a study by the Business Software Association of Australia.)