Currently there is no way to prevent a 720p game to upscale to 1080p on a 1080p tv: either the PS3 or the tv will upscale. Upscaled graphics are ugly, I'd gladly play with a smaller screen and black borders, and 1 on 1 pixel mapping in this case.
So, it would be very nice if there was an output option '720p to 1080p with black borders', for 720p content.
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If you want to display 720p content in a 1280x720 'window', you are barking up the wrong tree. That would be a TV option. The PS3 is only the output device. It is the TV that decides how to display it. If you want this option, you'll need to contact the TV manufacturer.
Unfortunately, every tv out there can *only* display on their max resolution. So I'd figure if the option of no upscaling were ever to be made available, it would have to come from the PS3. It would be a fairly simple firmware upgrade. (for example, most PC display drivers can already do this).
Note: I know the chances of Sony implementing this are low, but hey.
The PS3 will only output the native resolution of the source material.... most games are in 720p. Some of THOSE games can support 1080i/p resolutions if you FORCE the PS3 to display that resolution.
Unless you have a MASSIVE HDTV, and sit RIDICULOUSLY close to the TV you shouldn't be able to even tell a discernable difference in image quality across different resolutions.
Maybe try playing with the TV's settings and see what you find....
You should be looking for "Dot By Dot" "1:1 Pixel Mapping" "Overscan" "Screen Fit" "PC Mode" or something of the like on your TV..... Not all TV's support this sort of image processing...
I believe the PS3 has a settings or two about that so look in there as well.
The reason why is because TVs have been engineered with overscan built into them for a LONG time that our modern LCD TV's come with that by default.
Having a TV with such settings is a bit rare and its not openly advertised because most people don't actually know/care because they can't tell.... not everyone is a videophile.
If this is something that truly bothers you... you should become a member of the AVSForum. It has TONS of videophile and audiophile information to the point that its TOO MUCH to take in all at once and even to the point where you could no longer care less about the technical aspects of a TV, where you just want one that works and has a fast response time to play video games.
You should look for your TV on this list as it will provide you with some information about 1:1 Pixel Mapping and even list the nomenclature that your manufacturer uses in place of Pixel Mapping.
1080p TVs can only 'pixel map' 1080p sources, as far as I've seen/heard/read.
To get a feel of what I'm talking about regarding upscaling being ugly:
Watch a youtube video of a 720p game on a 1080p computer monitor. Compare full screen on = upscaling = ugly / full screen off = no upscaling = pretty.
So what I'm asking for: for the PS3 to provide a 1080p output signal with: in the middle: the 720p image, around it: black borders to fill the gap between 720p and 1080p. The TV just receives this 1080p image, which it maps nice and clean to its 1080p pixels.
Note: MKII from playstation store already uses this concept: the game is in the middle, with an 'arcade' border around it. It does this precisely to prevent upscaling from the tv.
If you 'pixel-map' 1:1, your TV SHOULD display a 720p source the way you are asking for it to. It may not display in the center of the screen (more likely it will display in the upper left corner of a 1080p display (which you can probably re-position through other settings on the TV), but it should pixel-map the 720p signal to display a 1280x720 'window' on your 1920x1080 display.
At any rate, I've been playing Tomb Raider (a 720p game) on my 1080p display, and I can't even see what you are talking about. The picture looks brilliant to me. The only real discernable pixelating I see is the rain drops that hit the camera 'lens', and then only when I look at them from about 6 inches away.