Two Western companies entered the promising Indian digital media market earlier this year: Spotify (NYSE:SPOT) and YouTube, the Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) subsidiary. Spotify launched in February, and about a month later YouTube introduced YouTube Music -- a premium music subscription option -- for YouTube music listeners.

The early results show strength for both companies, but YouTube Music has rocketed to the front of consumers' app launchers. Over 800,000 listeners pay for a subscription, according to a report from Bloomberg. That's almost as many subscribers as Gaana, which has been operating in India for nearly a decade. Twenty-five percent of Indians said they use YouTube Music as their primary app to stream songs in a recent YouGov survey.

Spotify, meanwhile, has reported its results in India have been better than expected. It reported 2 million listeners (between ad-supported and paid) in April, and management said it outperformed its internal forecast by 30% last quarter. Still, Spotify ranks relatively low on the list of primary music-streaming apps.

The YouTube Music logo.

Image source: YouTube.

The value of the Indian market

The prices for streaming services in India are extremely low compared to the rest of the world. YouTube Music costs just 99 rupees ($1.40) per month, and it still only has 800,000 subscribers. By comparison, Spotify added around 5 million paid subscribers to its premium streaming services priced around $10 per month in the 12 months ahead of launching in India. So the amount of revenue coming from subscriptions in India isn't very significant right now.

But India holds tremendous potential for digital spending. It's one of the fastest-growing economies in the world. Its internet population is massive, and still only accounts for around half of the country. That presents an opportunity to increase both subscriber count and average revenue per user over the long run.

Analysts at Noida-based TechSci Research expect music-streaming spend to increase from $150 million per year to $400 million by 2023. That's still peanuts for a company the size of Alphabet, but could produce a significant amount of revenue for a company the size of Spotify if it captures a meaningful percentage of the market.

YouTube's competitive advantage

But Spotify isn't competing on an even playing field. YouTube holds a considerable competitive advantage over Spotify and even the entrenched Gaana.

Earlier this year, Google changed the default music player on Android phones to YouTube Music. When your music streaming service comes pre-installed on nearly every smartphone sold in one of the biggest markets in the world, it's going to fuel adoption. Google notably just made the switch in September, so it's still early days for it to fuel adoption of the streaming service.

RelianceJio takes a similar approach. JioSaavn comes pre-installed on the free feature phones Jio provides with its inexpensive wireless plans. That's led the streaming service to become one of the most popular in the country after YouTube.

But Spotify offers a compelling product. Indian Spotify listeners rate it highly for its personalized playlists, which the company has upheld as one of its competitive advantages. Indians that actually use Spotify tend to rate it more highly in just about every respect. So the challenge for Spotify is to overcome the advantages of Jio and YouTube, which offer a near-frictionless way to get users on board to try the service.

YouTube's early success in the market should pick up momentum with the switch in Android's default app. Meanwhile, Spotify may need to get more aggressive with marketing to capture its fair share of the market.

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