In a far-off land, Jareth and his crew run afoul of a band of something or other. What are there a lot of in Muppet lands? Sentient chickens? Fizzgigs? Something like that. So they take cover in a cave. But the cave leads into a series of passages through a mountain that take them to a massive city of goblins.
The goblins attack, but Jareth's powers sway them, and he easily bends them to his will. Until he's brought before their leader, the flabtastic Gorkil, whose powers equal those of Jareth. The two are able to command and counter-command the goblins, with the exception of Jareth's loyal Muppets, who seem immune to Gorkil's will (because they're Muppets and you need to be like Jason Segel or Jack Black or whatever if you want to boss them around, not some tubby bitch in a cave town).
Eventually Jareth bids a skillful retreat, sensing an opportunity to gain a massive army and kingdom for himself, and in doing so discovers that his purloined goblin troops turn to stone in sunlight. And while he loses some of his forces, he gains valuable insight and begins to form a plan. A plan that will presumably require the boobs of Jennifer Connelly to pull off. As all plans should.