There was a third party app called Apollo for the Apple Watch. It used the cellular or Wifi connection of the watch to stream directly from the Spotify API.

Spotify issued a cease and desist within days. I still have it installed on my phone and watch - it's a long way short of perfect (when it loses its connection it hangs and there's no easy way to reset it) - but it does work.

So it's not Apple stopping the release of this functionality.

why would spotify issue a cease and desist to an app that keeps people from abandoning their service?

No idea, the developer said he was told they were violating the terms of the Spotify API agreement by using non-standard hardware. The only thing I can think of is Spotify had/has one of their own lined up and haven't released it.

I assume this is all tied up with their campaign about unfair treatment on the App Store, but it still makes little sense to me. Apollo was written by a single developer in their spare time, it works (although not perfectly - still good given it's a 1.0 and they were working alone with no support) and has been released for almost a year.