Why not just put all of the phone functionality into the watch? Maybe with a little bluetooth ear-piece that pops out of the watch similar to the S-pen with Samsung Note devices. Feel free to steal my idea, fellow HNers, because that is what I want!

Huawei kind of started something like that. Fitness band that pops out to be a bluetooth earpiece. I've seen it around a few times. http://consumer.huawei.com/minisite/worldwide/talkband-b2/

You don't actually want that. Plus, it's impossible. So there's that.

Two words: screen. size.

Why do you want this? A watch is too small (in my opinion) to replace a phone entirely, so you'd likely be carrying around a phone all the time anyway. Using bluetooth to share the phone's internet connection seems more sensible to me.

Ironically, a watch is just fine for taking phone calls. The Apple Watch can do it; I've used it a couple times when my phone was in the other room or I was driving and it was a lifesaver. It's actually a fair bit more convenient than speaking into a phone since it's lighter. Only problem is it's always on speaker, but in many cases where you don't have a phone handy, that's what you'd use anyway.

The reason you still need a phone is because we now use a phone for lots of tasks that used to require a desktop computer.

LTE takes significantly more battery life, which I presume is the reason nobody is doing it yet.