The principe that the shape of a building, or a product should be primarily based upon its intended function or purpose is a good one.
However, when it comes to smartwatches, the idea that a rectangle device works better does not mean it will translate to a universally good aesthetic the way a round watch design does. Therefore, in my opinion, the biggest dilemma with the Apple watch (and any rectangle smartwatch that wants to be more than a single purpose watch, like a fitness watch), is that while digital screens are not typically round, most watches are.
The problem is that a watch is a very personal item, made to be worn on your wrist, not held in your hand like a smartphone. So while a rectangle smartphone is perfectly fine, I think a lot of consumers will have a hard time matching a rectangle watch with their personal style choices. And this, is why I think that round smartwatches are ultimately more promising. Moreover, the design dilemma may be solved by a round smartwatch with superb voice technology that controls the majority of the functions. Then again, I am sure Apple has conducted so much market research, and has such a powerful influence on consumers, that they will prove me wrong and reach the projected first year sales figures. I guess we will see soon enough.