eBay, Yahoo! Battle in China

Bucking the odds, Yahoo! (Nasdaq: YHOO  ) has announced it's teaming up with Chinese portal SINA Corp. (Nasdaq: SINA  ) to start up an online auction service in the world's most populous country.

The venture will likely be an uphill battle, however, because of the long-established online auction "law of critical mass." When the site debuts at mid-year, it will be competing with Motley Fool Stock Advisor holding eBay's (Nasdaq: EBAY  ) EachNet, which may have close to four million registered users by then -- making it the largest e-commerce site in China.

The law of critical mass makes it unlikely the largest site in a country will ever lose its dominance. Most of the buyers go there because that's where most of the sellers are, and most of the sellers operate there because that's where the buyers are. Yahoo! should know this as well as anyone: It jumped out to an early lead in Japan, and eBay -- despite spending considerable resources -- was never able to catch up. It marks the only major country in which Yahoo! operates the leading auction site.

There are some factors that give Yahoo! and SINA a chance, however. First, the Internet market in China is still in its early stages, but it's growing extremely fast. Though EachNet has the head start, perhaps there's still time for the new venture to dig in and become a viable alternative.

Second, SINA is said to have a strong brand in China. EachNet clearly does also, but perhaps SINA's name will attract a few more users than normal.

Finally, the new service is initially targeting a slightly different market than EachNet, trying to draw in "small- and medium-sized businesses" to go along with other buyers and sellers.

According to eBay, China already has the world's fifth-largest Internet population behind the U.S., Japan, Germany, and the U.K. It also expects online e-commerce there to double every year for the next four years.

With the stakes so high, this should be an interesting battle to watch.