The physical media/ISO is not intellectual property. If you have purchased a valid license, then you are entitled to a valid copy of the software the license is applied to. How you obtain the software the license applies to is irrelevant.
You're right, physical media itself is not intellectual property. However the media can contain intellectual property. An entity who is not licensed to reproduce a particular intellectual property may not place that intellectual property onto physical media, and certainly may not then proceed to distribute it.
(If you have a license to use an IP, it is of course within the bounds of fair use to make a backup copy of it for personal use. You cannot distribute that backup copy.)
This guy wasn't making a backup copy for himself, he was duplicating discs at an industrial scale with intent to distribute. Huge difference.
You are 100% correct that when you have a valid license, you are entitled to a copy of the software. In terms of recycled computers, the license is tied to the chassis / motherboard, and as long as you have those you are entitled to software. If this guy was selling recycled computers with Windows installed, everything would be 100% OK. He wasn't charged with selling computers with Windows preinstalled. He was charged because he was printing out 10s of thousands of Windows discs and was going to distribute them (presumably to people who had licenses, but it sounds like he intended to profit from this distribution). That is a violation of intellectual property law. Even if the recipients had a license to the intellectual property, a third party cannot distribute the intellectual property to them.
Is jail excessive? Probably. Should he be fined? Most definitely.