Whoa, what happened? All of a sudden the song has teleported itself away from the joker and thief and to the watchtower mentioned in the title.
In interviews Dylan has talked about how this song isn't a true ballad because it tells a story backwards rather than forwards.
Most stories begin with general setting, followed by some specific conflict. "All Along the Watchtower" begins with the conflict and ends with the general setting. This is the point in the song when that "backward" shift takes place.
As for the verse itself, we've already mentioned how "All along the watchtower" is a somewhat awkward string of words (see "What's Up With the Title?"), but we can think of "the watchtower" as referring to some kind of perimeter used to watch out for approaching enemies.
This watchtower happens to be staffed by "princes," which we can take as a characteristically anachronistic (meaning that it belongs to another era) reference to the rich and privileged. From their lofty position, they can shoot at people without being shot at themselves.
While all the women came and went, barefoot servants, too.
Now, let's not exaggerate the similarities between Dylan and Eliot. One was a conservative poet who believed that tradition mattered immensely and who tried desperately not to be an American (to be fair, this is a caricature of Eliot, but it's the standard view). The other was an anti-traditional folk songwriter whom we now think of as quintessentially (or totally) American.
But we know from other songs that Dylan read Eliot, and Dylan's line "and all the women came and went" is too similar to Eliot's to be ignored.
Both men in the song are talking about the restless boredom of the pampered upper-class rich folks.
The people on the watchtower are pampered, to be sure. They even have "barefoot servants," as if they needed any more reminders of their superior status. Women, food, wine, servants: the watchtower has it all.