By Miguel Helft
October 25, 2011

FORTUNE — Tony Fadell has defied skeptics before. Ten years ago, when a slick gadget he conceived and helped to build hit the market, most analysts shrugged, saying the new tech toy would be irrelevant to most people. The prediction ranks among to top bloopers in the history of tech punditry. Fadell’s gadget, the iPod, sold more than 300 million units and, in the process, revolutionized the music industry.

Now Fadell, who has been called the “father of the iPod,” is hoping to prove skeptics wrong one more time. After leading the team that built the iPod and playing a key role in the development of the iPhone, Fadell left his executive role at Apple (AAPL) in 2008. For the past two years, he has been hard at work quietly building a new electronic gadget. Like the iPod, it is controlled through a simple dial. And like the iPod, it’s likely to be greeted with skepticism. It is, after all, a thermostat.

But if the iPod was no ordinary music player, the thermostat built by Nest Labs, Fadell’s startup, is nothing like the drab plastic devices that control heating and air conditioning in millions of American homes. For starters, the device, which is being introduced on Tuesday and will be available in mid-November, has the kind of elegant, minimalist design that Fadell learned while working for his former boss, Steve Jobs. More important, just like the iPhone made cellphones smart, Nest wants to bring intelligence to thermostats: the device programs itself based on your daily routines and the temperatures you set. It constantly refines itself, senses your comings and goings to adjust accordingly, and automatically turns itself off when you are away.

Fadell says Nest was built on ideas that he learned at Apple, where the iPhone was conceived not as a cell phone with smarts, but rather as a computer that could make phone calls. “This is not a thermostat with a bunch of communications features,” Fadell said during a recent interview in the company’s unmarked offices in Palo Alto. “It is a computer and communications platforms with a little bit of thermostat.” And it is designed to help people cut their energy bills, he said.

The idea for Nest came out of frustration. Fadell was building an energy-efficient home near Lake Tahoe. When his contractor showed him his thermostat choices, Fadell balked. “There has to be something better,” he said. While thermostats manage roughly 50% of a home’s energy use, they haven’t changed much in years. Millions of homes are stillequipped with manual thermostats. The more advanced programmable thermostats are difficult to use and require constant adjustments. “If you want to do any kind of energy savings, you are programming them all the time,” Fadell says.

With a team of veterans from Apple, General Magic, Sling Media and Web TV, and with financing from Kleiner Perkins Caufield & Byers, Google Ventures (GOOG) and others, Fadell set out to design and build the Nest thermostat. The device, which will be sold directly to consumers at electronic stores like Best Buy (BBY) for $249, comes in an elegant box and is easy to install. In the first week, it relies on manual adjustments. But after that, algorithms designed by machine learning experts, set the temperature automatically. Those algorithms refine themselves every time you manually adjust the temperature. Sensors constantly monitor temperature and humidity, as well as ambient light and activity near the device or farther away in the house. “We can see if there is anyone in your home,” says Fadell. “We learn your schedule and your temperature preferences over a week. And we adapt continuously over time.”

Adjusting the Nest thermostat is easy: you simply rotate the outer ring up or down. Pushing on the display opens a set of intuitive menus. It also can connect to your home’s Wi-Fi network, allowing you to control it remotely from a phone or tablet. PC and mobile apps allow you to monitor your energy use and savings. Fadell says that energy savings will help buyers recoup the cost of device in about a year.

While the Nest thermostat is clearly aimed at early adopters in the iPhone generation, Fadell says the potential market is large. There are some 150 million thermostats in American homes and another 100 million in small offices and businesses. Every year, some 10 million new units are sold. “That’s as many as bicycles are sold in the United States,” he says.

That may be true. But bicycle are toys that people love to play with and many fans will pay good money for bicycles they can show off. Thermostats? Not so much, which makes it all the more difficult to handicap’s Nest future.

Regardless, Fadell plans to push his company beyond thermostats. As the name Nest suggests, the company will continue to be focused on products for the home. “It’s our first product,” he says. “We have ambitions for more. There is a lack of innovation in the home and we can apply our design talents to things other than thermostats.”

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