What was the result of all of this government regulation of a natural monopoly? Prices for long-distance calls dropped rapidly. Services were upgraded in many areas that were previously "unprofitable". Technologies that made heavy use of previously existing infrastructure(ADSL) spurred technological advances.
This doesn't necessarily invalidate your point, but your recap of the results of the Judge Greene decision and the divestiture of AT&T is a bit off. The original Department of Justice rationale - this suit being pursued under the conservative Reagan administration, which you would have thought wouldn't wanted to do it - for splitting up AT&T was that it was an un-natural combination of heavily regulated industries (local phone service) and largely unregulated industries (long distance). The ultra-conservative DoJ anti-trust bigwig who actually pursued the case did so on the doctrinal belief that you should either be in a regulated business (rates set by a local Public Utility Commission, as local phone services are/were), or in a competitive business (market pricing) but not both since it allowed the competitive business to be subsidized by the regulated business and distort competition.
What was going on was actually the reverse - AT&T made lots of money selling long distance but not much selling local phone service, and in effect it was subsidizing your local phone bill with what expensive long distance service cost. So, while opening up the LD market to lots of competition did in fact drive prices down for consumers, most people's local phone bills went up because the ILECs were no longer being subsidized. Local phone company "innovation" pretty much went into the toilet (remember, they toyed with making modem users buy separate additional phone lines, and their idea of "broadband" in the early '90s was still ISDN). It wasn't until the advent of ADSL as a way to compete with other emerging broadband technologies forced their hand in the late '90s (in concert with the 1996 telecom deregulation act) that there was much innovation or cost savings for customers in play.
So in some ways the Ma Bell breakup was an interesting exemplar of the "law of unintended consequences" and a demonstration of how heavily regulated services can sometimes drive higher prices and lower innovation than ones with a more open market. Competition will always make a company move faster than regulatory bureaucracy - so your "HEAVY regulation" mentioned above would need to not just be regulation per se but the type that also incentivized investment and competition.
By the way, if you're really interested in the Ma Bell divestiture and its consequences, be sure to pick up The Deal of the Century by the Washington Post reporter who covered the trial and its aftermath.