Yet reggaeton (and trap) is the most popular music genre in Spain. I think that reputation is spred on social media and it's politically correct to say so in public but in the end people listen to it and dance it in parties. They buy and eat reggaeton. I can go even further and say it's the way some Spaniards pretend to look better over latinos as well, but that's more deserving for a sociology essay.
As for Lo Malo, it wasn't a good piece of reggaeton, it lacked of 'flow', the singers didn't fit the genre either, it looked forced, plastic and clumsy and that is the main reason why it was not chosen imo. I believe Spain can easily send reggaeton if the song is catchy enough.
I've read many comments against Lo malo because it is reggaeton, and they reject it only for that. And yes, many people listen to this kind of music and it's always in the Spanish Youtube trends, but the mainstream Spanish eurofan loves divas and despise reggaeton, it's a fact.