Originally Posted by WonderSausage
USB doesn't carry analog audio or video. USB1-2 has only 4 pins, two of them are power, the other two carry data. If you connect any device via the USB cable, the BMW's DACs are always used. There is no way DACs in a device could be used because there is no analog connection.
There shouldn't be any audible difference between any type of device connected with USB, assuming the same audio file on each device (different generations if iPads, iPhones, Windows phones, Android phones, USB sticks, etc.) The only way you could get an audible difference over USB is by delivering inferior data, e.g. recompressing the data. Recompression does happen over Bluetooth A2DP for bandwidth reasons, but shouldn't happen over USB, and shouldn't be different between iPhone 4 & 5.
I don't want to tell you that you aren't hearing a difference, but consider that it may be power of suggestion -- you've read of audible differences on the forums, and it's true that everyone using a Y-cable will hear a difference because with the Y-cable the DAC in the device is used instead of the DAC in the car (with the iPhone 5 the DAC is actually some cheap tiny chip embedded in the Lightning-to-30-pin adapter plug).
I played the same three songs(all from my desktop/iTunes DB, same files to the devices) back to back between the iPod and my iPhone5 and the iPhone5 is much flatter dynamically vs the iPod. I checked to make sure the equalizer settings between the iPhone and iPod were identical(same) and nothing was changed on the headunit between the two.
I agree that if the BMW DAC is doing the conversion there should be no difference but its there FWIW. Just ordered an older 4gen iPod to replace the dead one with Citibank points. Placebo saved me ~$100 I guess.