I can see a few possible reasons he'd say that, and all of them involve misunderstanding the Karma...

1. He thinks it's an iPod which plays the proprietary AAC format. But even that would be a misunderstanding since the iPod also plays non-proprietary MP3s.

2. He is complaining about data compression in general, and doesn't totally understand it. If so, he's missing the point of all portable MP3 players. If that's what he's complaining about, then he's probably an audiophile who's very adamant about playing non-lossy music. If that's the case, point out that the Karma will also play FLAC if desired (a non-lossy format). It just takes up about five times more disk space, spins up the hard disk more, and uses up the battery faster.

3. He somehow thinks that the Rio Music Manager software modifies the files, which it doesn't. It leaves the files intact and is merely a front-end to player's internal database. If that's the case, explain to him that the files aren't "messed with", they're just organized into the player's internal database. Explain that the player is lightning-quick with all of its searches and lists, it plays gapless, it caches aggressively and can keep the hard disk spun down, and it can crossfade. The only way to do this efficiently is if it handles its songs in its own database format and doesn't let you put the files on the player's hard disk willy-nilly.

You could also point him over here so he can ask technical questions and get technical answers.