Good point, though I think that few people paid that directly. From what I recall, base models have been $200 with a two year contract from the word go.
Nope, people who paid $600+ for an iPhone still had to have a two-year contract, they didn't even get compensated for it with a subsidy. And at the same time that you paid $600, AT&T was giving Apple a cut of the contract, something like 10 bucks a month from your AT&T bill went straight to Apple in the beginning. So Apple was really getting around $840 per iPhone over the life of the contract, $600 up front and $10/month for 24 months.
I'm not saying that they will drop the price of the watch but there is a history of them doing this with the first run of a product. Also someone mentioned they did something similar with the MBA in this thread.