Up-scaling and up-conversion are often used to mean different things in marketing speak... Up-conversion is typically used to describe a home theatre receiver that will take an RCA input (composite or component) and convert the video stream from analogue to digital. Meaning you can plug the composite cable into the receiver, it will then 'up-convert' to digital, allowing you to plug an HDMI cable from the receiver, into your TV or projector... instead of having to run another composite or component cable to your screen. Confused?
Here's a diagram.
No-upconversion: DVD player ---> composite cable (red/white/yellow) ---> Receiver (pass through of analogue signal) ---> composite video cable (yellow) ---> TV.
Up-conversion: DVD player ---> composite cable (red/white/yellow) ---> Receiver (up-conversion process occurs) ---> HDMI cable ---> TV.
Now up-scaling refers (in laymens terms) to the receivers ability to take a video source and improve upon it... So, in other words, a good upscaling chip in a receiver will be able to improve a standard DVD picture and improve the quality via video processing. Some people like it, some people don't... I'm normally in the camp that says 'try it, and see if you do'. After all, DVD players can improve the video, receivers can do the same, and so can TV's... but what one will do the best job? Well, it's a case by case basis, and something you have to check for yourself with your own kit. The connectivity remains the same as I have described above.
The thing is there are lots of different ways to do upscaling. The PS3 has heaps of options on this and is a fairly grunty graphical machine for instance. But a basic DVD player can also do this, but in a not so nice way. Ultimately your TV will take whatever input resolution you give it and scale this to fit it's one and only native display resolution.
Technically you could just run along a line of the display picture and insert a copy of each pixel along the way. That new 2nd pixel could be some nice combo of the original pixel either side of it, or it could be a straight copy of the original. Do that right down the page and you've magically scaled up your SD source towards the HD world. It may look like crap, but you can now slap a big 'upscales to HD' advertising sticker on the box. Depending on the approach taken and the hardware available, upscaling could look good or crap. Try it, but remember that every source is ultimately only going to ever be displayed at the native resolution of your final display device.
So, the question becomes, what does the best job with your content? When I was playing with satellite boxes I found the upscaling of the SD sauce simply created a lot of jagged artifacts that were worse feeding the TV the raw signal and letting it handle the scaling to fit it's native full HD display resolution.
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