Separate standalone DAC boxes are not necessary but they are a perfectly valid option.
Most mid priced CD players generally only have relatively poor DAC sections due to budget constraints. The DAC chip may be OK but chances are the circuit will be compromised with cheap poor quality power supplies etc. If you look in most cheap CDP you'll see a single small transformer powering everything and a single voltage reg supplying lots of IC's.
A separate high end DAC will likely have a better DAC chip and also much better power supplies and maybe a better clock etc. Generally speaking it may be like the DAC section from a really top end player. My last separate DAC had three separate transformers, two separate power supply boards something like 10 voltage regs and the PSU section was separated from the audio section by a copper screen. How many CDPs have that?
You could in theory improve these things in your existing CDP but that's going to be a lot of work and you might not have enough space. Of course a high end CD player will already have good power supplies, a good clock as so on and so forth but high end CD players are expensive.
With some exceptions (e.g. TDA1541) I think most people would agree that DAC chips have got better over the years. If you have a CD player with an internal DAC you'll be stuck with the original DAC chip however the transport itself may still be perfectly good. In fact some of the older transport mechs such as the Philips swing arm mechs are generally regarded as some of the best ever made and will probably outperform most modern mechs. If you have an old CD player with a good transport mech but a compromised DAC section an upgraded standalone DAC makes perfect sense.
But the killer argument for a separate DAC is that it can be used to upgrade lots of different sources. More and more music formats are going digital. A good DAC can be used to upgrade several sources not just your CDP for no extra cost. In this way standalone DACs can represent excellent value for money.
I always think that more boxes allows for greater flexibility in the upgrade patch. For example my pre-amp has been used with three different sets of power amps over the years. Another example would be my phono stage which has a separate PSU. A while ago I upgraded the PSU which brought a very significant sonic benefit at a modest cost (considerably cheaper than a better phonostage). If the PSU was not separate I couldn't have done this.
In the past I have owned two different standalone DAC boxes and I don't regret buying either of them.
However for what it's worth I now use a CDP with what I consider to be a good transport mech (Philips CDM 9) and one of the best DAC chips (TDA1541) because I felt this would give me the very best CD playback. Putting everything in one box makes more sense if CD is your only digital source. I do not have a streamer, I don't use my MP3 player for serious listening and I don't use my PC for music but if I did some/all of the above I would go down the route of a separate DAC instead.
Well that's the way I see things anyhow.
