You said: "Seriously, those who want LTE connectivity will pay for the service."
And just how many people do you potentially think would pay for that type a service?
it means making room to support LTE. Apple can't shrink the LTE radio/chip since Apple doesn't design the LTE chips. They buy them from Qualcomm/Intel/or potentially Samsung. So they can only shrink the things that they have control on, like the materials they use on the case, which battery they use, make a non-removable Apple SIM card (or a virtual SIM), the processor design, shrinking the taptic engine module, etc...
Disagreed.
And that's not the only option. Like I said, they did a Tmobile deal with one of the iPad launches that offered a lifetime of 250mb/mo which would be plenty for a watch.
I just don't see that many people paying $5/month for cellular connection with the watch.