I had a customer come in yesterday looking for a receiver, so I showed him some receivers that we carry. The Denon AVR-688 caught his eye so I started to tell him a little about. He saw that we had the 788 on sale for $599 and asked what was the differences between the two and the only difference I saw (I'm an onkyo guy) was the 788 had a Faroudja video processor. I know Faroudja is something that makes a difference in video quality but why would someone want to pay an extra $150 for a video processor? Doesn't most blu ray players have Faroudja already?
Different players have different processors, and even those with the same processing chip may perform differently, as the chip may be implemented differently. To see some examples of differences in DVD performance, take a look at (WARNING: The link is to a large page that may take some time to load):
http://69.64.68.156/cgi-bin/shootout.cgi?function=search&articles=all
See also:
http://www.hometheaterhifi.com/cd-dvd-player-product-reviews/dvd-players/oppo-digital-dv-983h-dvd-player---a-secrets-dvd-benchmark-review.html
Faroudja has been around a while, and have enjoyed a good reputation, so some people ask for it by name. But they don't seem to be the best these days.
Of course, you answered your own question when you asked:
"I know Faroudja is something that makes a difference in video quality but why would someone want to pay an extra $150 for a video processor?"
Someone would pay it for better video.
As for what is in a Blu-Ray player, no, they do not all have Faroudja already in them. In fact, Blu-Ray players don't seem to be the best for upconverting DVDs, though some are good at it; see links above.
Also, having a good video processor in a receiver is good because one can run all of one's video sources (except for a tuner built-in to a TV) through it. Some people have things other than DVDs and Blu-Ray discs that they watch, and they might want them to look as good as they can.