For father's day I bought myself a watch in the area Apple probably and hopefully should cover. I did a ton of research there and you'd be surprised at what can and can't work there.
For the record I also own an iPod Nano 6th generation with a watch band aka the "original iWatch"
Because Craigslist is my friend and because I have an interest in this area, I also own an Timex Global Trainer and a Nike+ Sport Watch.
For Father's Day the kid went and gave me what I requested which is the Tomtom Multisport GPS.
I suspect the Apple watch will be some cross between it and the Garmin Forerunner 620 and the new Tomtom Multisport GPS with built in HRM. It would be especially cool if Apple could reincorporate some click wheel action back into a design similar to the Garmin 620.
So big differences between the watch world and the smartphone world are screen size vs information being presented and very limited battery life. Tomtom partnered with Nike for their first watch and their second version is even better. They are the same size as day to day watches and cram a ton of useful functionality into a very small space. The Tomtom has accelerometers, 10 hrs of GPS life and a heart rate monitor build into a watch that is super light and looks like a regular watch.
The trade-offs are often color with regard to screen. It is hard to get a bright enough screen given the battery constraints and size. My iPod Nano watch is pretty much useless outdoors in terms of seeing the screen. Apple clearly realized a problem with the size as well when they offered the option of turning off the small icons in a grid of four and showing only one large icon at a time. Let us remember that Apple's original concept for the iPhone didn't have apps. It allowed them via HTML only.
A second issue with these GPS/sport watches is programming and websites. Basically they don't play very nice with each other.
Apple can basically take over the market if they produce a watch that partners well with the iPhone via low power bluetooth (maybe wifi), that has custom silicon that track pedometer and accelerometer movements with very little power and that can track requested information via GPS using smart sampling in the manner Apple does best. Smart sampling can dramatically alter the battery life of such a watch and they clearly have experience doing this with the iPhone and location tracking. The premium model can include a heart rate monitor.
The display needs to be viewable all the time and in daylight. Perhaps color e-paper or just black and white. The reality is that most uses of color and most other display technologies just don't solve the problem here.
Apple needs to have all the API's in place that allow the information from this watch to be shared with iPhone apps and websites. It can quickly swamp other standards and become the de-facto standard. The watch itself doesn't need to run apps. It needs to do things the iPhone cannot do like activity monitoring, going into the pool to record swims, vibration alerts from a purse, etc. When you buy a larger phone, you become less likely to just pocket it. (The largest phones I see used are done so by women always carrying a purse.) You don't need to feel a vibration alert from your phone when you can get it from your wrist.
So basically take the Tomtom Multisport with GPS. Remove the little pad below. Add the Garmin Forerunner 620 circle and call it the new clickwheel. Get the software straightened out in classic Apple fashion (For example the Tomtom doesn't feature auto-pause when doing an activity, a strange omission.) Have it able to vibrate your wrist with notifications for alarms, reminders and text messages from your iPhone (thus encouraging the Apple ecosystem), perhaps include a mic for Siri and finally it must be waterproof.
Apple would easily be able to charge $250-$400 for such an item. Competitors already get that for their inferior and miss-mash solutions.