Bob Dylan recorded All Along the Watchtower for John Wesley Harding, released in 1967. The song itself is unusually compressed: three verses, no conventional chorus, and a cyclical harmonic structure. Even the narrative / lyrics are strange, with the first two verses are dialogue between the joker and thief, while the final verse suddenly gives us the watchtower, approaching riders and gathering storm. 

Dylan's recording matches that economy. Hendrix heard the album very soon after its release. Dave Mason recalled listening to an advance copy with Hendrix; Watchtower immediately caught Hendrix's attention, and within days they were recording it at Olympic Studios in London on January 21, 1968.

And this is important for how we approach the transformation theme. Hendrix doesn't alter Dylan by reharmonising the song into something vastly more complicated. He recognises the dramatic possibilities inside the repetition.

The basic Hendrix arrangement

The Hendrix recording is centred on C♯ minor, with the recurring progression essentially moving:

C♯m – B – A – B

So there isn't a verse progression followed by a harmonically contrasting chorus followed by another progression for the solo. We can think of this as vi-V-IV-V in the key of E.

The same cycle keeps returning. That presents an interesting arranging problem:

How do you make approximately four minutes of music continually intensify when the harmony barely changes?

Hendrix's answer is orchestration. The guitar becomes several different instruments over the course of the record. The underlying track itself is revealing. Hendrix initially played six-string acoustic guitar, Dave Mason played 12-string acoustic and Mitch Mitchell played drums. Hendrix subsequently played the bass himself and built electric guitar layers over that foundation. The Engineer/Producer Kramer describes the finished recording as evolving in successive layers, beginning in London and continuing with overdubs in New York. The video below is the live version, but this can be heard on the official album version.

So when you hear the giant electric-guitar part, you should first notice that underneath it is an acoustic rhythmic engine. This can work as a good arrangement with another guitarist or with a looper pedal.

The opening immediately announces the guitar as the dramatic voice. He effectively starts with a solo-style intro. The vocal enters, and the guitar largely becomes an accompanist. Then, at carefully chosen points, it moves forward.  

This creates a structural alternation, something like:

Introduction → vocal → guitar statement → vocal → larger guitar statement → vocal → climactic guitar passage/outro.

I think it's a good approach to sketch out a song structure like this (as a kind of dynamic story) when you are dealing with a repetitive chord structure. The guitar therefore performs a function normally supplied by sections of a song. That's why I would hesitate to describe Watchtower simply as a song containing “a great guitar solo.” It's more of a succession of guitar episodes that are part of the arrangement.

And that makes the major solo entrance so effective

Hendrix doesn't merely begin soloing because sixteen bars have elapsed. He interrupts the song. He shatters it. The guitar arrives with a change of register, intensity, articulation and timbre. The listener experiences it almost like another character entering the narrative.

And importantly, Hendrix has earned that moment by withholding it.  Restraint → anticipation → entrance → escalation. That is arrangement.

The wah-wah is especially clever

The wah shouldn't be understood merely as an “effect that makes the guitar sound psychedelic.” For sure, it certainly went a long way to define this. (Check this out https://vimeo.com/200510512?fl=pl&fe=sh#t=16m53s)

A wah is essentially a movable resonant filter. Rocking the pedal changes the frequency area being emphasised. Hendrix could therefore make a sustained or bent note change its vowel-like quality while the pitch itself remains relatively stable:

oo → ah → ee

That makes the guitar extraordinarily vocal. In the link above, Kramer talks about how integrated Hendrix was in his use. This circles back to my previous comment about being in the record shop in Limerick, Ireland, and asking about this guitarist who could make the guitar talk. Whilst I now know I was referring to the talkbox (Framptone) that Peter Frampton used on Do you feel like we do, from his Frampton comes Alive album, evidently making the guitar talk was what related to the Wah pedal and Hendrix.

In Watchtower, the wah-drenched passages contrast with other guitar sounds Hendrix has already established. So again, it is arrangement through timbre. Instead of:

verse / chorus / bridge

Hendrix can create contrast through: cleaner guitar / distorted guitar / octave guitar / wah guitar / single-note guitar / double-stops / acoustic texture. The sound of the guitar becomes structural.

His phrasing is equally important

if wqe strip away the fuzz and wah and much of Hendrix's vocabulary is recognisably rooted in blues and pentatonic playing. But it's important to listen to the shape of the phrases. He doesn't just blaze through runs of the C♯ minor pentatonic continuously. You'll hear short statements, long sustained bends, bursts of faster notes, double-stops, octave figures and substantial changes in register. So you can a classic blue call and response structure:

short phrase → space → answer

then:

bend────────

then:

rapid phrase → resolution

then:

octave statement → repetition → intensification.

That is much closer to speech than scale practice. If we want to create our own phrasing and solos over the progression but still pay homage to Jimi then don't ask “what scale is Hendrix using?” Start with

Ask:

“What is this phrase doing?”

• Is it asking a question?
• Is it answering something?
• Is it increasing tension?
• Is it repeating an idea?
• Is it climbing?
• Is it landing?
• Is it leaving space?

That changes our attention from notes to rhetoric/or telling a story. B.B. King explains it beautifully here, https://youtu.be/Thja3cvEJWY?si=-3Gp7PQ_fRLesd6y&t=560 

The octave passage is a brilliant example

One of the memorable solo textures is Hendrix's use of octaves. Instead of suddenly introducing new harmonic material, he changes the density and register of the melodic material. A single-note line becomes a bigger octave sound. Then the wah changes its colour. Then bends and more conventional blues-rock vocabulary can take over.

Enjoy!