Update: I have given up messing around with the iPhone settings and decided to alter the resolutions of the videos stored on my iPhone from widescreen to anamorphic. That way, the horizontally compressed anamorphic videos will get "corrected" when they are stretched by the iDrive during playback. Hopefully later versions of the iPhone firmware will make this temp workaround unnecessary. For those who are interested, this involves cropping of videos to widescreen (854 x 480) followed by scaling to (640 x 480).
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