In 1905 Paris, the Opéra Populaire hosts an auction of old theatrical memorabilia. Among the attendees is the elderly Vicomte Raoul de Chagny, who purchases a papier-mâché music box with a monkey figurine. The auctioneer then presents a shattered chandelier that has been renovated with electrical wiring, alluding to a connection with "the strange affair of the Phantom of the Opera, a mystery never fully explained."

Lot #666: A chandelier. In pieces.

They are rehearsing Hannibal when they learn that new owners, Firmin and André, are taking over the Opéra Populaire.

Carlotta, the Opéra's resident soprano prima donna, begins to perform an aria for the new managers when a backdrop falls from the flies, barely missing her and prompting anxious chorus girls to whisper, "He's here! The Phantom of the Opera!". The managers try to downplay the incident, but Carlotta angrily insists that such things have been happening for "three years" and storms out, quitting the show.

With cancellation of the sold-out show being their only other option, the managers reluctantly audition Christine and are surprised to discover that she has real talent. As Christine sings the aria during that evening's performance, the Opéra's new patron, Raoul, the Vicomte de Chagny, recognizes her as his childhood friend and playmate.

Backstage after her triumphant début, Christine confides to her friend Meg that her singing has been inspired by an unseen tutor she knows only as the "Angel of Music".

When Christine hears the Phantom's voice in her dressing room, she begs him to reveal himself. The Phantom obliges, appearing as a ghostly, partially masked face in her mirror. Believing him to be the Angel of Music sent by her deceased father, Christine is irresistibly drawn through the mirror to the Phantom, who leads her down into the shadowy sewers beneath the Opéra house.

As the Phantom composes music at his organ, Christine awakens to the sound of his monkey music box. Overcome with curiosity, she slips behind the Phantom and lifts his mask, only to discover that his face is horribly disfigured.

The Phantom demands that Christine replace Carlotta as the Countess in the new opera or the managers will face a "disaster beyond imagination". But Firmin and André refuse, assuring the furious Carlotta that she will remain their star, and insisting that Christine will play the Pageboy, a silent role.

The première of Il Muto initially goes well, until the voice of the Phantom suddenly cuts through the performance, enraged that Box 5 was not kept empty for him as he had instructed.