Prerequisites: Any type of wall, can only be built in cities.
Watchtowers are an improvement of walls. They provide a bonus to Rally Point ability to see unit types of incoming enemy armies. They can only be built in cities.
Watchtowers are not separate buildings, they are an improvement of walls. While watchtowers cannot be directly targeted by enemy rams or catapults, if the walls are destroyed, the watchtowers are destroyed as well.
You can upgrade watchtowers up to level 20, regardless of the level of walls.
Each level of watchtowers improves the Rally Point bonus by 3. For example, if Rally Point is on level 20, it allows you to see unit types of any attacking army of fewer than 20 units. Each level of watchtower increases this number by 3. So watchtowers on level 20 together with Rally Point on level 20 allows seeing unit types of any attacking armies of less than 20+20*3=80 units.
Watchtowers also increase the population of the city, without increasing its crop consumption, unlike regular buildings.