Although, the two terms in the world of connected devices are sometimes used interchangeably, there is a significant difference in the two. In my view, its a logical path of progress from the M2M ecosystem towards IoT ecosystem. On one hand, M2M is more holistic concept involving communication in any form between two dumb devices, the IoT refers to the next generation of communicating terminals involving data transfers over IP networks at a higher layer.
In the connected devices paradigm, there are three well separated layers of operation as shown in the figures below. The maturity level of the components in the three levels provide the key differentiation between the two ecosystems.
In the M2M ecosystem, all three layers are lesser evolved than in an IoT ecosystem.
The three layers will see evolutionary changes in the next 3-5 years to reach a maturity level in the IoT ecosystem. The video below gives an interesting understanding of IoT phenomena and how it may affect our lives in the near future.
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