Well, Guile’s stage on the arcade is much worse than this. The girl on the background is giving a handjob to one of the soldiers NO KIDDING! And I think the Super Famicom version kept that.

Depends. If you’re using RCA, your chroma and luma are being crammed together into one signal. That’s why S-Video is better than RCA, your chroma and luma have discrete signals on a single cable. He was likely using S-Video. Most of the time, when I see signal problems, it’s the cable that’s to blame, not the system.

If you’re using an old-school connector (pre-HDMI), the brightness is carried separately from the color. So if your connector is half-broken or inserted funny, you can lose just the color part of the signal.

No, the NES had slightly different hardware (lockout chip on US model, audio pins on JP model). But there are adapters you can use. Some old games have adapters built into them if you take off the case.