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The Wear emulator technically looks like Android, but on a small screen, and with a different "launcher".
You can run many existing Android apps on it. I tried one of mine, and it worked, more or less, but the UI was squished as would be expected.
This is why it's called "Android Wear". It's just an Android variant. There may be some "normal" Android APIs it won't support, and there will be watch specific APIs I'm sure.
IMO, it makes sense and is smart of Google to do this. I don't want to deal with 10 different smartwatch OS's.
NOW is the time for a bigger, richer smartwatch OS, because it's now possible to put enough ARM compute power in a watch sized device.
I presume that Google Play will support watch apps at some point. And I'm looking forward to seeing custom watch ROMs. I hope there won't be too much locking down of devices, or at least a Nexus watch or 2 that can be unlocked.