Nearly all of the controversy regarding the Smaug's name centers around the au. Normally when English readers (especially Americans for some reason) come across this vowel combination we pronounce it as it sounds in words like daughter or launched. Thus, we often say Smaug like smog. In Appendix E of The Lord of the Rings (and in most of Tolkien's Middle-earth books) a guide is provided that explains how to pronounce the non-English words. There Tolkien provides a different pronunciation of au for his languages.* According to him, au should be pronounced "ow" as in loud or how. So, the word Smaug should be pronounced Sm-ow-g, not Sm-o-g. If it helps, think of adding a "w" (Smauwg) or think of the au in Smaug as sounding like the au in Sauron.
*Well, for Elvish anyway. Speaking of which, why should we follow elvish pronunciation? Is the word "Smaug" elvish? If not, why should we follow the elvish pronunciation? It's a good question, one that doesn't have a conclusive answer (or at least one that I know of). However, we do know that elvish greatly influenced the languages of Men and the Common Speech or Westron (see Appendix F - Of Men). When exceptions regarding pronunciation or spelling occurred Tolkien often made note of it in the Appendices. Also, some of the best Tolkien language experts have worked or are working on The Hobbit films and they direct the pronunciation of all non-English words that make it into the film. They have made a point of making sure the actors pronounce Smaug this way (with au sounding like the ow in how). (So why Peter Jackson says Shmaug is beyond me...)
|Conversation With Smaug by J.R.R. Tolkien|
When people incorrectly say Smog instead of Smaug they often at some point also envision smog (fog or haze), a bit of a play on words that is fun to think about. (I can think of the smoke from Smaug's fire as appearing like a thick smog.) However, Tolkien was telling a different joke, one that you probably didn't get unless you were skilled in Old Germanic languages or read part of a letter Tolkien wrote to the editor of the Observer in the early part of 1938.
The dragon bears a name - a pseudonym - the past tense of the primitive Germanic verb Smugan, to squeeze through a hole: a low philological jest. (Letters No. 25)