ATT had a monopoly, and they were partitioned to break that monopoly.
If ATT had kept their monopoly they would not have had much pressure to compete through price or innovation. What might we not have today in the consumer telecom space if ATT had kept their monopoly. For example, would our phones still be wired to the wall and owned by ATT? Would new colors on princess phones be the extent of innovation?
I doubt it because Motorola and others were already making cell phones when AT&T was broken up in 1984 [1][2].
Also, of the 7 Baby Bells that the original AT&T was broken up into, most have merged again. There's only Verizon and AT&T left. On top of that, now AT&T wants to merge with T-Mobile USA. But has mobile innovation halted in the last decade?
To bring it closer to home a bit - I'm originally from Canada, where up until a few short years ago there was a single GSM operator in the entire country. The country as a whole, when it comes to mobile telephony, is still years behind the USA, not to mention Europe/Asia.
I remember college, when smartphones started taking off, and affordable data plans started appearing. In Canada this was completely unseen. Why? The lone carrier was making a killing charging $300+ per month for enterprise BlackBerry data plans against cash-flush companies willing to pay the price. Introduction of consumer-appropriate data pricing would've gutted that. So they didn't, and there was nothing anybody could do about it.
It took years for consumer data plans to hit the market, and by then the damage has already been done. Canada is still laughably behind the times when it comes to mobile internet use, and while the US was running away with innovative ideas like mobile music streaming, tweeting on the go, sharing pic from your phone to Facebook, Canadians were still texting each other like idiots.
So yeah, long story short, the breakup of AT&T was a good thing. The re-merging of them was bad, though apparently not bad enough to hold the industry at a complete stand-still.