Our kids are allowed to have ipods, etc. on the bus. Theft doesn't seem to be an issue on the bus (obviously because the kids are USING them there, and the thieves don't want to take these expensive toys by force and have their identity known); however, theft is a huge issue during the rest of the school day. Our kids are very lax about watching their things -- leaving things in a locker with no lock, sharing their lock combination with friends, leaving things in a bookbag while they head to the cafeteria, leaving things in a bookbag in the locker room while they go to the gym for PE -- these are the places I hear theft occuring.
Noise cancelling headphones are much better for the child's long-term hearing. With cheaper headphones, the tendency is to turn the music up so it can be heard over other noises; with these better headphones, the extra volume isn't necessary.
I do agree that NOT hearing the bus driver is a huge safety concern. Also, I'd ask how long he rides the bus. If you're talking about a ten-minute ride like my older daughter, I'd say he doesn't need entertainment for that short period. On the other hand, if like my younger daughter he's unfortunate enough to ride for almost an hour a day, then a treat like this might be reasonable.