Using it as a watch was an afterthought. They'd added a clock function because, basically, all the iDevices with displays have some kind of clock functionality so it was going to show the time somehow. The second version of the square Nano included more watch faces because Apple noted the aftermarket was selling watchbands for it.
An acquaintance has a square nano he used as a watch for a while but said it didn't really work that well for the job, particularly when bluetooth was enabled. I forget the details. Sounds like Apple had a good idea in there but it didn't quite work.
That could one of two things IMO: Nokia is doing something right design-wise, or Apple is running out of ideas.