As you may have read, a strange and dramatic fight is escalating in the Chinese Internet between Qihoo 360 and Tencent, maker of the ubiquitous QQ messaging platform.

In short, anti-virus software maker Qihoo 360 accused Tencent of giving out private user data and turned its privacy protection software guns on QQ. Tencent has big muscles in China and its flexing them: It accused Qihoo 360 of something similar, telling users to uninstall the software if they want to keep using QQ. That the standoff is so tense — and critical to the Chinese Internet given the power and reach of the two players– that the country’s Ministry of Industry and Information Technology and the Ministry of Public Security have stepped in. There doesn’t appear to be any solution yet.

Why should you care if you’re not in China? Because China is the largest Web audience in the world and Tencent is the king of it. At north of $40 billion, it also has the third largest market capitalizations of any Web company globally, just edging out eBay and  soaring even higher in the last few months. And it has international ambitions. It owns 10% of Mail.ru, which in turn owns huge chunks of Facebook, Groupon, Zynga and other Western Web 2.0 giants. Watching how Tencent throws its weight around the Web is now as important as watching precedents set by Google or Facebook.

I know what you’re thinking: Chinese companies are up in arms about the rights of individuals online? But let’s put that aside for a minute. This is a test of just how powerful Tencent is becoming– more important, how it views its power in the world’s largest Internet market. Chinese sources are saying they’ve never seen a battle like this amid the normally low-key Web giants, and it’s hard to remember one like this in the Valley. The closest I can remember is the throw down between eBay and Google over payments where eBay blocked Google Checkout transactions on its site and when Google pushed back, eBay pulled its ads. No one won: As Mike said in the link above Google came off like a wimp and eBay came off like a bully.

That spat was nakedly about power in the check out market. This fight is ostensibly about user’s infomation and  the crucial question is whether either of these companies are indeed sticking up for users’ privacy rights or it’s all just competitive posturing. As far as I can tell no one really knows. And that’s the point. In the blackbox of the Chinese Internet, it’s almost impossible to know who is protecting users and who is just protecting their fiefdom. That means it’s not in the interest of China or the Web for any one site to have the power to strong-arm users stop using another popular service.

We’ll see how the market votes. Will the desire to connect with friends over QQ win out over software that prevents viruses? The world’s Web elite should pay attention: If Tencent has that much power, that’s even more staggering than its market cap.

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Authors: Sarah Lacy

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