Ross said:
Except that with the compression used can be heard by some folks, especially with really good speakers.
Play the same sone in a row, one off the ipod and one off a CD, you might be able to hears what I trying to describe
I'll agree with you that poorly encoded MP3s will sound... poor.
However, I get very good sound by using high bitrate encoding and a good encoder (I personally like the sound I get from VBR LAME, with 192 as the minimum bitrate).
I did exactly the comparisons you suggest, using the factory head unit and my Ipod. The factory headunit had rolloff at above 12khz and below 50hz. My Ipod, on the other hand, goes cleanly to at least 16khz and down to 23hz. The frequency response of the Ipod is obviously affected dramatically by the encoding used. Overall, the factory radio makes a decent clock.
Having said that, I find that critical listening to music is best done in the house. Cars, while they can sound amazingly good, cannot compare to the sound quality of a properly set up home stereo. For one example as to why, the background noise at home is very low and the car environment is very noisy.