I have tried both solutions. The media player won hands down in terms of practicality, support for audio-video formats and sheer ease of use. In addition, I could easily store the files in FLAC format (music) and keep updating my songs on one PC HDD and play them from any room in the house, since each room has a media player connected via LAN.
The DVD USB menu was difficult to navigate, could not search for the songs I wanted quickly and response time was slower.
Coming to the most important point - Music quality... there are good standalone media players like Squeezebox and Popcorn Hour (Sonos is too costly in my opinion) that are as good or better than most DVD players in the 10-20K Rs bracket. If you still are not satisfied, you can always add, in the future an external DAC like Beresford or DACMagic, since all mediaplayers today have a digital output option.
Since you are looking for a DVD replacement, I suggest going for the Popcornhour, which costs $260 (direct from website) for shipping to India. Otherwise the TVix (marketed by La Kozy in Mumbai) is also a very good option for both movies and music. There is another thread on 'Networked Media Tank' or some such which has many more options and players compared.
-Jinx.