Just got off the phone with an apple watch technical support agent for 45 mins. Tldr; The agent believed Spotify and all of my previous purchases/freely downloaded apps (~50), under the same apple-id as set up with the apple watch, are non-standalone and not supported apps.
2 things to note about this.
1) There are specifically developed "standalone" apps and non-standalone ones ("requires iPhone"). There's no indication as to which are which until you go to download the app from your apple watch and don't see "requires iPhone". We talked about Spotify since recent articles surfaced (eg. tech crunch in November) outlining it can be used "standalone" on cellular supported watches without your phone. The agent wasn't aware of this. As an alternative, I was able to successfully download pandora and get streaming standalone from my watch. Not a great final solution but it works.
2) I'm not convinced it is true that all of my past purchases are non-standalone apps/not supported on a family share apple watch. The only way to check this is to have an account that hasn't already purchased the apps. I would assume pandora is not the only stand-alone third-party music app supported on a family shared device, but I'm unable to check since i've previously purchased (freely downloaded) all of the other major music apps.
As for the password, the agent informed me this is "for security" even though I noted the purpose of the passcode.
The 45 minute phone call was ended with the note that family sharing is only ~3months old so these things are likely just not supported yet, and that I should post on discussion.apple.com.
I'm very sad with the outcome. Given the inability to access most of the watch apps using family share, I find it hard to justify keeping the watch.