I'm having a really hard time installing updates on my S3 lately. I tried to install 7.1 when it came out and my watch had only 2GB free space (of 4GB total). I uninstalled all apps I could and didn't have any other content on it (music, photos, etc). I finally had to reset the watch and set it up again to get 7.1 to install.
Today I tried to do 7.2 but had the same issue (only 2GB free, the update required 2.5GB free). Again, this is with no content on the watch and only the stock apps installed. I was finally able to get 2.2GB freed up and it looks like the install is progressing now.
I don't know why I have 4GB capacity but only 2GB free right off the bat with setting the watch up with my iPhone. Hopefully the install goes thru so I can use Fitness + tonight.