^ Correct. The Media snap-in handles audio and video directly. And in fact not only is there no way to connect a Y-cable while the phone is in the cradle, the Y-cable isn't even used anymore. Now you just connect via the normal white Apple USB cable to get (digital) audio, control, and even album art.
The ONLY extra benefits of the Media cradle over USB are PlugIn (native iPod interface on the iDrive display) and playback of videos stored on your phone -- the latter only works while stopped. Some people have claimed improved reception, but that's dicey on an iPhone because it doesn't have an actual external antenna connector like a BB, so any benefits would be inductive through the baseplate. And of course using the cradle frees up your USB port for something else to connect and charge too.