Is Yahoo preparing for China exit?

The headlines have been buzzing this week with word that tarnished former Internet titan Yahoo (Nasdaq: YHOO) will shutter its Chinese Internet music service, with many pointing out the move reflects a broader reshuffling in the online music space. But from my perspective, the much more intriguing question is whether this move represents the first small step before Yahoo withdraws from the market completely – a step that seems increasingly likely as it focuses on turning around its core US search business.

Such a withdrawal would mark the end of a long and colourful chapter for Yahoo in China, which was one of the first major global players to discover a market that has gone on to become the world's biggest in terms of Internet users, who now number more than 500 million. That said, let's step back and take a look at the latest media reports that say Yahoo has quietly announced it will close its China music service effective on January 20 next year.

Yahoo gave the usual vague explanation for the closure, saying it represented a change in product strategy. With the exit, Yahoo will still operate search, news, e-mail and mapping services in China. Other media are pointing out that Yahoo's closure of its music service looks strikingly similar to a move by rival Google (Nasdaq: GOOG), which earlier this year also closed its music search service.  Chinese search leader Baidu (Nasdaq: BIDU) has also recently downplayed its popular music sharing service, which has been criticised for facilitating swapping of pirated songs, in favor of a new service with legally licensed music at its core.

All that sounds interesting and legitimate enough, but from my perspective this particular move by Yahoo looks like it could perhaps be part of a broader strategic re-evaluation of its global operations that is now taking place under its new CEO. That new chief executive, Marissa Mayer, took over at the helm of Yahoo earlier this year with the difficult task of turning around a company that pioneered the Internet search space but has lost its direction in the last five years as it was overtaken by Google.

We saw a similar re-evaluation take place nearly a decade ago, when Time Warner's (NYSE: TWX) former high-flying AOL unit abruptly withdrew from China and Asia after the Internet bubble burst. In this case, Yahoo came to China with big fanfare about a decade ago, when it instantly became the country's leading search company with its purchase of the leading local search engine at that time.

But Yahoo's business rapidly lost market share to Google and a fast-rising Baidu, which went on to become the nation's dominant player with more than two-thirds of the market. In the meantime, Yahoo formed a tie-up with Chinese e-commerce leader Alibaba, which also tried but failed to reinvigorate the company's search business.

At this point Yahoo is basically a non-player in the China market, and I'm honestly not sure why it even bothers to maintain a China presence since it seems to be making little or no effort to improve its position. Mayer is most likely having the same thoughts about not only China but many of Yahoo's other globally underperforming assets that drain away resources from the company and do nothing to help its bottom line. Accordingly, I wouldn't be surprised to see the company make a low-profile withdrawal from China as part of a broader global retrenchment next year, marking the end of a long and difficult chapter for the company in China.

Bottom line: Yahoo's shuttering of its China music service could reflect a broader re-evaluation of its global assets, which could end with a complete withdrawal from China next year.