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It doesn't need a camera...

iPhone knows your latitude and longitude --- your position on the surface of the Earth. It also knows the location of each star. Lastly, it knows which way your screen is pointing.

That's all the knowledge that's needed in order to display a starfield on the screen.

Thanks. I thought it would process the data on screen just like this augmented reality translation app (forgot the name). But this approach is really interesting. I need to check the app out :)

You're thinking of Word Lens. http://questvisual.com/

It also knows the time of day (to figure out where your sky is pointing).

I can guess GPS plus compass plus accelerometer is enough to know where it is and which way it is pointing. You're right it would be hard for the camera to see the stars.

It's not a camera - well not entirely :). It's a rendered star field that moves with your orientation in 3D space.