Apple's Watch is designed to be both fashionable and functional.
3rd iPhone Sensor is Another Proximity Sensor
Apple previously included one proximity sensor near the earpiece of the original iPhone to prevent accidental key presses when the phone was held against your face. By adding a second proximity sensor, Apple is said to have improved this face-detection functionality. As a result of this addition, case manufacturers have increased the size of the opening surrounding the earpiece of the iPhone.
Details of the 3rd sensor had sparked speculation that Apple could have included a front-facing camera to enable video conferencing. No front-faced camera design, however, was announced at WWDC.