Bilbo and the Dwarves watch from the Lonely Mountain as the dragon Smaug sets Laketown ablaze. Bard breaks out of prison, and eventually kills Smaug with the black arrow brought to him by his son Bain. Smaug’s falling body crushes the fleeing Master of Laketown and his cronies, who were escaping on a boat laden with the town’s gold. Bard reluctantly becomes the new leader of the people of Laketown, with the Master’s conniving servant, Alfrid, acting as Bard’s reluctant servant, as they seek refuge in the ruins of Dale, while Legolas travels to investigate Mount Gundabad with Tauriel. Thorin, now struck with “dragon sickness” over the vast treasure in the mountain, searches obsessively for the Arkenstone, which Bilbo had previously found but kept hidden. Thorin, hearing that Laketown survivors have fled to Dale, orders the entrance of the Lonely Mountain sealed off.
Meanwhile, Galadriel, Elrond, and Saruman arrive at Dol Guldur and free Gandalf, sending him to safety with Radagast. They battle and defeat the Nazgûl and a formless Sauron himself, banishing them to the East. Azog, marching on Erebor with his vast Orc army, sends his son Bolg to Gundabad to summon their second army. Legolas and Tauriel witness the march of Bolg’s army, bolstered by Orc berserkers and giant bats.
Thranduil and an Elf army arrive in Dale and form an alliance with Bard in order to reclaim a treasure once withheld from them by Thrór. Bard goes to the mountain and asks Thorin for the share of gold that he had previously promised the people of Laketown, but Thorin refuses. Gandalf arrives at Dale to warn Bard and Thranduil of the threat posed by Azog, but Thranduil dismisses him. Bilbo sneaks out of Erebor to hand the Arkenstone over to Thranduil and Bard so that they can trade it for the treasures they were promised and prevent a battle. When Bard’s and Thranduil’s armies gather at the gates of Erebor, offering to trade the Arkenstone for the promised treasures, Thorin angrily refuses to believe they have the Arkenstone until Bilbo admits giving it away and chides Thorin for letting greed cloud his judgement. Outraged by what he sees as betrayal, Thorin nearly kills Bilbo, but Gandalf appears and shames Thorin into releasing Bilbo. Thorin’s cousin Dáin arrives with his Dwarf army, and a battle of Dwarves against Elves and Men ensues, until Wereworms emerge from the ground, releasing Azog’s army from their tunnels. With the Orcs outnumbering Dáin’s army, Thranduil and Bard’s forces, along with Gandalf and Bilbo, join the battle, fighting the Orcs. However, a second front is opened when many Orcs, Ogres, and Trolls attack Dale, forcing Bard to withdraw his forces to defend the city, while Alfrid takes a bunch of gold and flees from Dale to his ultimate fate.