The software acts as the bridge between your smartwatch and Android phone, so it's a key element of the overall experience. The companion app is used to manage apps and notifcations, for example, and is the primary way of configuring the watch's Bluetooth connection.
Of course, now that Android Wear will support Wi-Fi networks -- your watch won't need to be in close proximity to your Android phone to work -- the new companion app has settings to manage wireless network settings. Google calls this feature "cloud sync" and explains how it works because it's not just a way to pass notifications from phone to watch over Wi-Fi.
Instead, the setup screen notes, as you'd expect, that data from both your Android phone and Android Wear watch will be stored on Google's servers.
Some may not be happy with that, but it's a necessary evil for Android Wear watches to be in sync when not in Bluetooth range of your phone. Google's cloud sync services are also a staple for the company's products: Think of how Google Docs, Gmail, Contacts, Google Voice and other service data is all kept in sync on any device where you've signed in with your Google account.
Android Police also noticed that multiple Android Wear watches can now be paired with the companion app on a single Android phone. While that's a nice feature to have, I don't anticipate many people to have several Android Wear watches. As a device reviewer though, I'll certainly appreciate the feature. The software update also allows you to choose which calendars are synchronized with an Android Wear watch; a useful feature that most Android Wear owners will want.