The technology is here or almost here to evolve the iPod Nano into a watch. It makes sense that Apple will do so.
In the wake of a Steve Jobs keynote comment, the new and miniaturized iPod Nano has found a new role as geek chic wrist wear of the moment. As soon as one gets past the doing-it-because-you-can stage though, you probably realize that the Nano does not, in fact, make a very good watch.
Running a wire from your wrist to your ear so you can use the Nano as a music player--which is sort of the point--rather than just a timepiece with a short battery life is inelegant. Keynote comments notwithstanding, Steve Jobs would not approve.
But there's the germ of a real product here.
Consider that, besides clock and music functions, the Nano also has a pedometer which will count the number of steps you take. A partnership with Nike adds additional fitness-tracking options. It's a good match given that many people listen to their compact musical players while they exercise.
From there, it's not much of a stretch to imagine adding GPS. Doing so would add more options for tracking the distance covered through various types of workouts. In fact, Garmin already makes a complete line of GPS-enabled watches pitched for runners.
Bluetooth would dispense with the need to run a wire for music listening.
You'd need a physical redesign. While shrunk relative to previous models, the new Nano is still too boxy (and probably too garish as well) to really work as wrist attire. The Italian ADR Studio has provided, by way of Photoshop, a peek at what an iWatch might look like.
Of course, such a device needs to be built and built economically.
With respect to cost, nothing I've described would likely add a huge cost bump over the current Nano.
As far as size goes, the aforementioned GPS watches have trimmed down greatly in recent years and Bluetooth finds its way into any number of highly miniaturized devices.
Battery life might perhaps be the biggest stumbling block if the device were to be an actual watch rather than just a GPS-enabled iPod Nano with Bluetooth that happens to be attached to the wrist rather than clipped or strapped somewhere else. Displaying the time constantly on a color backlit LCD would be a non-starter. But perhaps tapping the face to display the time would be an acceptable compromise in such a device.
Whatever the details, it seems a natural path for Apple to follow as the technology allows--especially in a spot within its product line where Apple has been especially open to stylistic reinvention.