Bluetooth is needed because the lightning connector will not output analog video like old 30 used to. Bluetooth allows the unit to track your touch inputs and relay to the phone, so it knows when and where your input registered.
Other than Pandora being a little sluggish I've enjoyed the experience thus far on Iphone 5. Android users have the same solution implemented since the beginning. While lightning has shaken up the industry and everyone has been left scrambling, it's a much better connector than the 30 pin and in a couple years the old 30 pin won't even be missed.