2 Reasons iPhone 7 Demand Is Skyrocketing

By Markets Fool.com

iPhone 7 and 7 Plus. Image source: Apple.

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If you thought this year would be a dull upgrade cycle for Apple's (NASDAQ: AAPL) new iPhone 7, you'd be wrong. Despite the fact that Apple is testing the waters by using the same overall design for the third year, all indications have been that demand is skyrocketing.

Apple thinks it will be so supply constrained that it didn't release launch weekend figures today, like it normally otherwise would have. iPhones have always been supply constrained at launch, but the company is suggesting that it's worse than normal. Carriers also reported robust preorder activity last week.

Here are two potential reasons the iPhone 7 is experiencing such high demand.

There's no free lunch, but there is a free iPhone 7

The domestic carriers have all launched or matched promotions offering customers an iPhone 7 for free when they trade in an iPhone 6 or newer. While the carriers offer various types of promotions every year when new units are released in the autumn, this one is particularly aggressive. The promotion essentially offers a $650 trade-in value for any iPhone 6, 6 Plus, 6s, or 6s Plus. That's enough to cover the cost of a base iPhone 7. That's quite a generous offer for a base 16 GB iPhone 6 that's two years old, but less so for a fully loaded 128 GB iPhone 6s Plus from last year.

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The new dual-camera system. Image source: Apple.

The catch is that the trade-in value promotion is spread out over the course of two years in order to create lock-in. You also have to pay extra if you want the 7 Plus and/or more storage. Regardless, the carriers continue to poach customers from each other, and it seems that every year the promotions are getting increasingly aggressive. Apple is the biggest beneficiary here.

The competition is literally exploding

You've probably heard something about those exploding Samsung phones by now. The challenge for Samsung is that its smartphone brands aren't meaningfully differentiated, so the current crisis with the exploding Galaxy Note 7 is also likely dragging down sales of other flagship devices as well. That could potentially include the Galaxy S7 as well as the Galaxy S7 Edge.

The South Korean conglomerate's efforts to outdo Apple have backfired badly, rushing the Galaxy Note 7 to market prematurely at a time when Apple is already enjoying high levels of Android switchers. Giving up the headphone jack seems like a small price to pay to be confident that your phone won't set your car on fire.

Samsung is stumbling through an official recall as we speak, but the damage to its brand will be lasting.

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Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.