So I have a quest where a player walks to a certain location and a dragon there starts talking to the player (kind of like parthurnaax)
I got the dragon to sit still on his perch (and not immediately attack the player) and deliver his dialogue to the player.

The only problem is the minute I approach said dragon, the epic 'dragon battle' music starts playing, which kind of drowns out the dragons voice. He does show up as a red marker on my compass, but he is not attacking, and his sit package has the flags 'ignore combat' and 'no combat alert' enabled.

Any ideas here? Do I have to make the dragon 'friendly' to the player in order to prevent combat music? If so, what is the best way to go about doing that?

Make the dragon friendly (Or Neutral may even do it), then you can either use http://www.creationkit.com/Faction.SetEnemy_(Papyrus) to make him enemies with the player, or you can use http://www.creationkit.com/Actor.StartCombat_(Papyrus) to force him to attack the player. Either way would work and would result in the dragon not initiating combat (No red dot, no combat music) and not attacking the player until the script command is fired, at which point he would begin combat and the music would start.