This is a research note from Omar Talpur, analyst for Security and Building Technologies at IHS. The note comments on the differences between ?connected? and ?smart? thermostats.

When Nest Labs introduced the Nest Learning Thermostat in 2011, the company awakened a dormant thermostat industry. In the prior few decades, consumers had not seen much improvement in thermostats and the improvements that did occur were more cosmetic than functional – for example programmable thermostats with touchscreens that became available around 2005.

Development of more technical features, such as wireless communication between air conditioners and thermostats, were created to benefit installers rather than end-users. Since the introduction of Nest, there has been a renewed interest in developing end-user features rather than installer-focused features.

With a new emphasis on end-users, and the success of Nest, some manufacturers have started labeling their products as ?smart.? This misdirection has spawned confusion in the marketplace, since the features and specifications of many so-called ?smart? thermostats are not technically ?smart.?

The term ?smart? is not regulated by any particular government, group, or agency. In fact, it is similar to the marketing term ?natural? as used on the labels of grocery store items. Like ?smart,? ?natural? has no standard definition, but it gets confused with foods labeled ?organic,? which does require a set of governmental criteria to be met. Individuals unaware of the difference may end up paying more, while getting less.

In the latest IHS The American and EMEA Markets for Thermostats report, ?smart? thermostats are those that are connected to the Internet and make automatic adjustment decisions regarding heating and cooling, based on some type of input.

Examples include the following:

• The Ecobee 3 uses presence sensors located on a property, that sense when people are present, so the climate can be changed accordingly
• Honeywell?s Lyric thermostat uses geo-fencing technology, to determine when a homeowner is getting close to home
• Nest uses presence sensing in the thermostat, to determine when people are present

Other than these three examples, there are many other thermostats currently labeled as ?smart,? but their only defining characteristic is the fact that they are connected to the internet. IHS uses the term ?connected? in these cases, as these products do not make decisions based on external inputs.

While IHS has made this distinction, several leading manufacturers have not, which means some consumers think they are getting a truly ?smart? thermostat, while in actuality they are only getting a ?connected? thermostat.

This confusion is one of the factors leading to more ?connected? thermostats than ?smart? thermostats being sold in North America in 2014, even though press and advertisements in the industry emphasizes ?smart? thermostats.

Out of all thermostats shipped in North America in 2014, roughly 15 percent were connected, while 12 percent were smart. The remainder were traditional thermostats with no Internet access.

The major advantage of connected thermostats, versus their smart thermostat competitors, is a lower price point. A typical connected thermostat costs around $100, while a truly smart thermostat costs around $250. As retail prices shift over the next few years, it will be compelling to see whether smart or connected types will become more dominant in the market.

If the price of connected thermostats falls to around $50 or $60, they will garner a greater share of the market; however, as consumers become more educated about the differences between the two types of products, and as smart thermostat pricing falls, many high-end and do-it-yourself installations will choose to use smart thermostats.

Whether pricing or consumer education has greatest effect on the growth of thermostats remains to be seen; however, it is certain that the thermostats market has been revitalized with the introduction of Nest and other smart thermostats.