One generation behind still would be better than being 2(+) generations behind... This whole "waiting on Intel" is just nonsense. If Apple couldn't have thought of anything to do with their "innovation" skills for the MBP or Mac Pro other than to wait for Intel, yikes.
As far as watch sales... It's obvious watch sales aren't going to boom. Doesn't take a supply chain analyst to figure out. Apple dropped a very expensive piece of kit in what is still a niche market serviced by several companies, positioned it next to existing brands on one end of the use scale that are expected to last way longer than even Apple's stretched out cycles (the case of mid-to-high end watches), and all of the competitors have a product that do most of the useful things in daily life (except iMessage if we're being honest) and retail at lower price points.
Whoever wasn't impressed with the Original AW's extra features are probably, if not already, going back to fitbit and garmin or sticking with those. The people who do not need to have the latest and greatest probably expect 3-4 years from their purchase of the original AW because of how pricey it is and won't be getting a Series 1 or 2 (I'd argue that WatchOS 3's vastly better app refresh routines probably convinced more than a few people to hold off on a Series 2 just for the S2's performance boost). That leaves a majority for Series 2 being the "second version'ers" and the "gotta have the latest APPL gear" people. Which is a very small slice of an already small pie.
Apple could ameliorate this with the iPod Shuffle.
The Shuffle makes an excellent entry level device, and if they keep it around, they'll need a better way to interface with it. So why not take a note from the Apple Watch and allow it to be synced and managed by the iPhone, and other mobile phones? That way Apple can keep the price low by not adding a Touch screen. Since most people use it for workouts, why not add an accelerometer? And maybe a few more health sensors. It could also be used with chest straps, and other outboard sensors. Since it would have a BT radio, it could basically be used as an entry level Apple Watch, or Apple's answer to FitBit, all for around the same $50 price tag. And just like the old nano/watch trend, fitness straps could be used with it to wear on the wrist, encouraging a fitness band accessory market, just like the Apple Watch.
Currently, Apple can't competent with FitBit which currently has significant market share. So either they drop the price of the Apple Watch which does a lot more than just fitness monitoring, or they add some of the same functionality to a product that's already being used in that capacity like the Shuffle. Or, they just don't worry about competing with FitBit, and continue offering the Shuffle as a single function music player, or discontinue it with the rest of the iPod line in a year or two. Seems like a missed opportunity if the latter is the path they chose.
Apple doesn't really have an entry level Watch product, the way they have an entry level iPhone, iPad, Mac, TV, and currently an iPod. Once Apple eliminates the iPod line (Touch replaced by SE, nano replaced by Watch), the Shuffle will be the sole representative. In a world of multifunction devices, it's hard to imagine a $50 mp3 player being in much demand. And make no mistake the Shuffle has been $50 for years without necessarily adding any new features the way Apple's other products do. The Bluetooth radio is a must, and adding relatively minor features like an accelerometer will not affect their bottom line at all, and make the Shuffle more relevant to a broader market that isn't interested in the upsell to the Watch.