Because an iWatch is what the iPhone was to the iPod. Look where the iPod is now. Miniaturization of components will eventually allow the iPhone to become second fiddle to the iWatch as the latter takes on more and more function.
Now before you say that an iWatch will never have a big enough screen to replace an iPhone: The original iPhone took on a problem that smartphones had back then. The internet wasn't made for small touch screens. You might have thought back then that you'd still need to carry around a netbook to adequately browse the internet or use developer made applications. The advent of mobile apps purpose built for small touch screens resolved that.
Similarly, Siri is already hinting at how Apple will solve the problem of smaller screens. When you have a question you want answered by the web, instead of giving you a list of websites that might provide that answer, Siri just gives you the answer. An answer that could easily fit on an iWatch wrap around screen and given audibly as well.
iOS7's new simple philosophy is ideal for a watch as well. Apps specifically designed for a small screen that wraps around your wrist will make today's large screen seem totally excessive and redundant.
Productivity, photo/movie viewing will be functions that'll fall to an iPad. You'll probably have to carry an iPad Pro for work anyway. Each tool has its use. Or perhaps AppleTV will make AirPlay displays so common that beaming a photo or video to any nearby TV will become the new norm.