according to pioneer.(so only applies to pioneer)
when used thru a usb cable the ipod decodes the audio and protection and then sends a PCM data stream to the head unit and then headunit decodes it as if it was an audio cd.
so even if you dont hear the difference the sound is better quality.
also when you use the headphone jack, the sound goes thru the ipod sound processeor which is designed mostly for headphones. so you get that really funky sound that hurts your ears.
thres a reason why a digital connection exists: it transfers data without losses and interference compared to analog.
and the usb also charges your ipod , shuts it down and sends the song info to the head unit