A recent teardown of Apple's Digital AV Adapter for Lightning connectors reveals that the unit comes with an embedded ARM system on a chip, complete with 256MB of RAM, which some speculate acts as an AirPlay decoder.
The discovery was made by developers at Panic Software, who stumbled upon the ARM chip in troubleshooting the device for video-out capabilities in an upcoming project.
As Apple describes it, the Lightning AV Adapter "mirrors exactly what you see on your device so that everyone in the room can enjoy it on your widescreen TV, video projection screen, or other HDMI-compatible display." It also supports 1080p output from an iPhone 5, fifth-gen iPod touch, fourth-gen iPad or iPad mini. As seen above, the unit sport a Lightning connector and an HDMI output.
Source: Panic Software
It is unclear why the accessory would require such advanced hardware, but Panic believes the adapter is outputting video by using Apple's AirPlay protocol. The firm was led to the conclusion after noting image artifacts and limited resolution suspiciously akin to those found when an iOS device streams to an Apple TV.
All we can figure is that the small number of Lightning pins prevented them from doing raw HDMI period, and the elegance of the adapter trumped the need for traditional video out, so someone had to think seriously out of the box. Or maybe they want get as much functionality out of the iPad as possible to reduce cost and complexity.
Initial testing of the adapter also found that Lightning may not be able to support full 1080p resolution over HDMI, lending credence to the theory that the device is actually converting the output signal into an upscaled AirPlay stream.