I've been reading up here on different audio setups for the pool. I just wanted to share how we do it.
I'd like to start with, this is not cheap by any stretch of the imagination, but most of this equipment I use for my Christmas Display. (See http://www.rjsoap.com if you're interested in that.) I also use some of this stuff for my daughters baton group when they do parades. I have a "Boom-Box" with a 15 inch sub, two 10 inch mids, and two tweeter horns with 2400 watts worth of amps that sit in the back of our Expedition and plays music for them during the parade. So this stuff is getting multiple uses, and was not purchased just for the pool. (or overgrown bathtub as the case may be)
First, all the music gets played from the computer in my office. I use OtsAV DJ Pro for the software. I think I've tried every dj software out there, and by far this is the best. (Simply because it works, and it works everytime!) http://www.otsav.com While it can play MP3's, it would behoove you to convert them to their proprietary .ots format. It has a built in dynamics processor for AGC, Comp, and Limiter, with i/o gain controls and an equalizer. Auto Beat Mixing (If you're into that) and almost perfect automatic fades everytime! I say almost, because each fade is based on the two songs coming and going and it probably gets it perfect 99.5% of the time. It's only once in a blue moon that I hear a fade and think, "Ouch, that one hurt!" Ots has a 30 day trial if you're interested.
Now the music get's piped over to the FM transmitter from Ramsey Electronics. These guys have been around forever, and are in and out of trouble with the FCC all the time. Which if you'd like a translation, they know what they're doing and like to push the borderline. It is a kit, so if you're not "VERY" handy with a soldering iron you might want to tackle some easier kits before attempting this one. Here's the link: FM30B Transmitter. They have a pre-assembled and tested version, but is only for export and can not be shipped anywhere in the United States. They used to sell it in the U.S. a few years ago, but got in trouble with the FCC for it.
I also have this antenna for my Christmas show, but that's WAY overkill for running tunes to your pool, as the supplied whip antenna will do just fine. If you're going to go this route, make sure you're intimately familar with the FCC rules and regs for running this. (Or whatever governs your particular country) Don't want anyone getting a huge fine!
That's basically it for this setup. Now we can use any portable radio, or stereo system to tune in to "Our Radio Station" and listen to whatever we want to listen to, and I'm in charge of the sound quality. We had an extra stereo leftover when I upgraded our house, so that's what we use by the pool.
I know there are cheaper FM transmitters out there, and even Ramsey's has cheaper versions. Just beware of frequency fades and shifts and other geeky things that can also get you in trouble with the FCC. "Trouble" is relevant here, they'll start with a cease and desist letter, and then only if someone (probably a neighbor) complains. As long as there are no complaints, there's really no trouble. I only have about 35 neighbors in the 2 mile diameter that I'm able to transmit to with the big antenna I have. They all like the christmas lights, so no one complains. Oh, which btw, is about 1.99999 miles over the legal transmitting limit. (Shhhhh....)
Enjoy your music, no matter how you get it there!