It's not, and no one ever said it was. The demo analogy isn't valid; a free-to-play game is a fully functional game. IAPs may unlock additional functionality, or help bypass time gates, or whatever, but the "core loop" of a game shouldn't (under the guise of freemium, anyway) be restricted by payments.
This isn't to say that it doesn't happen -- not every developer really understands freemium, and some bastardize it. But can you really argue with consumer preference for freemium? If consumers hated freemium, it wouldn't dominate the app store.