> gov's case doesn't really correspond to reality

It does because if Facebook didn't monopolize the social media space maybe we would see innovation instead of blatant feature copying. Instead we have 3(4 if you consider Threads as one) platforms owned by the same company that push the same content - posts, reels, stories and actively try to unify and cannibalize each other. Breaking them down to individual companies will absolutely improve the market.

But how will it improve the market? By making a less addictive (read: less engaging) app that does social media "the old fashioned way" where you connect with friends an not much else?

I love that intention, but it wouldn't be competitively viable. That's why yes, social media in that form is over. The reason Instagram and Facebook are valuable is because billions of people have accounts there and are habituated to go there in every spare second and look at whatever the screen serves them, whether that's Johnny from 7th grade math getting married or a snake being friends with a cat in rural Egypt.