Here's what I'm thinking/guessing about Apple's iWatch:
The iWatch will be about health, identity, and mobile payment.
Apple's recent design language suggests a circular form that would take cues from traditional clock geometry. The Mac Pro, the fingerprint reader on the front of the iPhone 5S, and the circular cutouts on the back of the iPhone 5C case all anticipate a rounded watch face.
Take a stack of 3 US quarters and round off the top edge like the top of the Mac Pro cylinder and that's the basic shape. Cut two parallel lines through the middle quarter, splitting it into three pieces, then throw out the middle piece and sandwich the remaining two pieces back between the upper and lower quarters to form a conduit through which
interchangeable watchbands can pass. This design would also allow sensors to remain in contact with the skin on either side of the watch band, if necessary.
The face of the watch would have a fingerprint reader, perhaps as a ring around the watch face, and the edges of the watch body could be capacitive touch areas that would provide a dial-like interface. Wearers could navigate by pinching either side of the watch between the thumb and index finger of the opposite hand and rotating around the watch face. This sort of twisting swipe gesture around the watch face would allow the viewer to see the watch face while navigating. It may also be possible to perform gestures by swiping along the watch band. Sapphire seems like an obvious choice for the screen surface given its durability and Apple's investment in the material.
The band would likely have integrated sensors that would detect when the watch is unfastened/removed from the wrist. Other health monitoring sensors and perhaps touch/swipe sensors could also be integrated.
The watch face would likely be circular and include a basic touch screen and fingerprint sensor. Wearers would not swipe the screen directly for most navigation as this would occlude the screen, but could tap on the screen or scan a fingerprint to confirm a selection or identify themselves.
Overall, I expect the device to have more in common with a Braun BN0021BKBKG than a Pebble.
Apple wants to distinguish the iWatch from other smart watches and wearable technology like Google Glass. Designing a smart watch with a classic form that looks more like a traditional watch would be consistent with Apple's general minimal industrial aesthetic and would help the Apple brand considerably. I can see Schiller and Cook talking about technology that gets out of the way and poking fun at wearable computing that expects you to strap a computer to your face.
Of course, Apple would want to accessorize and monetize the heck out of this thing. That means interchangeable, multi-color watch bands and premium leather options. By including proprietary sensors in the band, Apple can control (or exclude) third-party vendors that might make alternative watch straps. The band's sensors could interface with the watch body through a connector hidden inside the watch body, which the band would pass through.
If they wanted to differentiate a premium model from other options, they could include the fingerprint sensor and/or charging options on higher-end models.
The key limitations will be miniaturization and battery life. Apple will limit the watch's functions as much as possible to conserve battery life and provide an upgrade path for future models. In a tiny device, it simply isn't possible to include audio or video playback and hit battery life targets at this point. I don't expect any Siri functionality and only limited notifications and status updates are likely. Apple will steer clear of the pitfalls that brought down the Jack-of-all-trades Galaxy Gear and focus on executing a small but important set of core functions well.
Beginning with health, the first generation iWatch will likely have the most compromises in this area. Apple will likely focus on simple Quantified Self (QS) functions like counting calories burned and general activity level. They certainly want to encourage owners to wear the device as much as possible, but battery recharging may limit the ability to monitor sleep. The two obvious opportunities for plug-in or induction charging are overnight or during bathing.
If they could, I'm sure Apple would prefer to create a "self-winding" iWatch that would capture energy from natural arm motion to power the watch. This would encourage users to never take the watch off. Given that this probably wouldn't be possible on early and/or entry-level models, I expect Apple will have convenient rapid-charge options for when users are in the shower.
Moving on to identity, this would be one of the key functions of the device. Apple will provide statistics about how much time users spend entering pass codes into their iPhones and will implement authentication features for iOS and OS X devices that will allow users to unlock their watch once per day (perhaps with a fingerprint swipe) and then automatically unlock all their other Apple devices while within range.
Finally, mobile payment would be a windfall for Apple. They could pitch the watch, perhaps with a fingerprint sensor, as a more secure payment model than credit cards. They frequently brag about having more registered credit cards than other companies and having a more affluent customer base than Android. If they could capture a small commission on all their customer's purchases, even at brick and mortar locations, they'd make another fortune.