Google and Verizon recently put the net neutrality issue on the front burner by teaming up to advocate a lack of net neutrality in the wireless marketplace. People are up in arms over this approach because wireless mobile Internet access is expected to become the main way people will get online in the near future. As a result, the fear is that access providers will overcharge consumers for access to different content delivered via their mobile networks.

But instead of the current debate over net neutrality rules, I would rather see us focus on the underlying problem that drives the interest in net neutrality, which is the lack of competition in the Internet access market. Most people in the U.S. have only one or two choices for Internet access. Due to this near monopolistic power, the providers engage in rent seeking where they maximize fees that they otherwise would not charge if they faced significant competition. Even in the mobile arena, there are relatively few choices, especially if you own a particular phone that only works with certain networks. For instance, the iPhone only works on AT&T’s network due to an exclusivity contract, and your CDMA Verizon phone won’t work on a GSM network such as T-Mobile’s. Choices narrow even further because most people buy phones at a reduced fee and essentially pay for it on an installment plan via a two year network access contract with high early termination penalty fees.  So the transaction costs (buying a new phone or paying an early termination fee) of switching networks are high, further reducing competition.

I think we can all agree that services improve when thousands of providers compete with each other. The question, then, should be: how we can open up the market to more competition? If the market was truly competitive, providers wouldn’t engage in the behavior that net neutrality advocates fear, namely, overpricing access to specific content.

What do you think? Is net neutrality a red herring?