Quoted from PinMonk:It's pretty clear they're just playing video clips. However, the animation is so sparse and infrequent, they would be WAY better off just displaying the art cut from the original uncompressed (or, well, much LESS compressed) source frames and using a simple animation system to move them when necessary.
Video is nothing more that a series of frames playing back - Its all 'animated' - the thing you seem to be proposing is less frames playing back per second, which would simply result in a jerky effect. All digital video is 'compressed' (IE nothing you ever watch is truly uncompressed) to some degree and its all a cost/benefit analysis of performance vs quality. Batman '66 is not just running video clips, they are running video clips that are being served up randomly accessed and with images composited over them on the fly. This all takes horsepower and its a process that will probably be improved over time - if not on this pin, then over the life of this system.
EDIT: In re-reading your post, you seem to actually be addressing the graphic overlays - there is no separating those, they have to be composited onto the video for final output. Thats just how things work - you end up with one final video image/stream thats piped onto the display and its all a part of the same level of compression.