I do think/hope that it is possible to do 24 bit color on the display with a software update. I really doubt the 16 bit limitation is in the hardware. In fact, seems like it'd be more difficult to make a display with only 5 bits per color channel as it's usually easier to work at the byte (8 bit) level than it is to "lop off" three bits from each channel. That just leads me to believe that the display is probably working at the 8 bit/channel level but the software that drives it is only running 5 of those.
Yep. An LCD display controller simply provides power to change each LCD subpixel element (think: aperture) to a pre-defined state. Given the nature of those chips in the supply chain, I agree - it seems it would be much more difficult to take that step backwards in hardware.
One example catalog page shows a single WVGA mobile LCD display controller being controllable as 16 or 24 bit - its product brief goes into a little more details (warning - it's a sales pitch).
Analog and Peripheral ICs - Toshiba America Electronic Components, Inc.
http://www.toshiba.com/taec/components/docs/ProdBrief/06I08_HSIOsolutns_ProdBrief.pdf
I _saw_ smooth color gradients, even if I couldn't reproduce it without 16-bit banding thereafter - I _saw_ it.
So - yeah, software. I won't even begin to guess why.
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