Panic:

There’s a lot more going on in this adapter than we expected: indeed, we think the Lightning Digital AV Adapter outputs video by using AirPlay (or similar MPEG streaming). Are we off base? Let us know!

Apple's critics have often accused Apple of using impractical technology for the sake of aesthetics. This does nothing to help Apple's case.

If Panic's observations are correct, then the question is why did Apple do this? If they went to the trouble of shrinking an AirPlay device into a tiny adapter, sacrificing quality to do so, why not just make it a wireless HDMI AirPlay receiver? A device like that would be a big seller.

Maybe Apple was afraid that it would cannibalize Apple TV sales. Which just strengthens the case that Apple needs to open up their platform, at least a little. I don't want a Roku free-for-all where third party apps can crash the box, but I would at least like to have a lot of the Roku content that Apple TV lacks. The lack of UFC on the Apple TV has tempted me to buy a Roku, but why should I have two devices hooked up to my TV when I just need one?

UPDATE: It looks like we may have an answer.

Via TidBITS.