You're grossly overestimating what mobile tech was capable of in 1998. The dreamcast had enough power to play an mp3 but the VMU definitely did not. On top of that, the VMU only has enough storage space for a little over 6 seconds of music at 128kbps. Even if the Dreamcast could (very very slowly) rip CDs to MP3 , you still had no where to save the data.
No shit the VMU as it was isn't capable of MP3 capabilities. Not sure how crazy tech advanced you think mp3 players were in the beginning, the simplest mp3 players didn't even have a screen, they were plug n play with direct drop file library- no software required and ran on a single AA battery. Also not sure why you think the disc reader wasn't fast enough. Most people were happy to spend 2-3 hours ripping and burning a music disc. I think you're comparing it to modern day expectations.
The Dreamcast came out in time where people were happy with any tech that was dual purpose and any that was cable of multiple functions received huge attention.
Here's Sega's VMU Mp3 player prototype: not saying this specific one would have been the one, just saying it's capable.
If the Dreamcast didn't get discontinued in early 2001 then sure, it's possible they could have released an mp3 player vmu. We don't even know if the TGS prototype was a functional unit or just conceptual mockup. Either way, it would still be a case of too little too late.
When I said it would rip CDs very slowly I was referring to the processing speed, not the drive speed. Comparable processors of the time would encode at about 0.6-0.8x speed depending on the encoder used and I doubt the average consumer would want to spend 2 hours to encode a single CD worth of music on their dreamcast.