The DVD player composite encoder will low-pass filter the 720x480 YCbCr digital picture prior to encoding in NTSC or PAL. This is to comply with the spec for baseband composite, allowing the video signal to fit in the allotted RF bandwidth prior to modulation.
If the composite video exceeds that allotted 4.2MHz bandwidth, bad things happen to the sound carrier when they get modulated to RF, so that's why it's not supported or available on a DVD player.
Y/C (S-video) is the step-up alternative that provides better luma bandwidth (although chroma is still limited to that provided by composite).
So the number of lines on baseband composite is only as good as RF composite format allows - about 330 lines, as you state.
So why did (and do) DVD players limit composite video bandwidth, even though it's technically possible to send higher resolution signal if RF isn't in the signal chain?
It's not a technical issue, but a marketing one.
In 1997, when DVD was introduced, TV coax-in was the norm. Sets with A/V inputs were still a premium item. High end cinephiles adopted DVD component for home theater, migrating from (composite) laserdisc. They upgraded their whole signal chains because, well, they could.
Meanwhile, low-end consumers delayed their TV upgrade for HDTV (1999) and/or flatscreen+HDMI (2002-ish). In those several in-between years they soldiered along with coax-in RF or, if they were lucky, A/V-in until their TV upgrade cycle came, and with it, new-TV choices sporting a slew of better inputs including Y/C (S-video), component, and slightly later, HDMI.
We can divide the DVD player era into two distinct time periods:
- Pre-HDMI (1997-2002): Component for high-end, RF for cheapskates and Grandma
- Post-HDMI (2002 onward): Whoo-hoo! A new big ol' flatscreen from Costco! Forget RF!
In either pre- or post-HDMI era, there was no incentive for 'better', non-RF-compatible composite in a DVD player. Pre-HDMI it would have been an annoyance for the many, many RF users. Post-HDMI, buyers couldn't care less about juiced-up composite because there were so many better connection choices on the new flatscreen TVs whether they wanted HDMI or not.
And let's not forget about the content providers who were freaking out at the idea of any higher-quality format enhancing the ability to capture analog out to re-encode for 'piracy' (nevermind DeCSS rendering that point moot). The last thing they wanted was better composite (let alone component); they worked really hard to make it worse with Macrovision. That rights-freakout hellbeast carried over to HDMI, with its own fun set of problems and hassles.
Anyway. And now, storytime. My first trip to Costco, January 2005. Standing in the next checkout line, a younger, Santa Cruz Mountains looking dude with exactly two items on a flat cart:
- 40" Vizio TV
- handle of Tanqueray
And I thought to myself, "that cowboy is ready to par-tay!"