Friend of friend is a BMW master mechanic. Said he drove a Z4 with SMG and wasn't thrilled. I believe the same unit is on the 330. It doesn't have as many "modes" as in the M3.
I test drove an M3 SMG twice, once for speed, second time for "city driving". Getting going in 1st and shifting 1-2 wasn't so smooth, but there is probably improvement with experience. After 2nd, it's pretty smooth. I tried it with several settings (shift speed). Downshifts are really smooth. I doubt it ever gets real smooth in auto mode. One salesman says he can drive it and passengers think it's an auto; however, I did not go for a ride with him. One thing, when you hit the sport button, the acceleration is even faster.
The "problem" is that the M3 always wants to be driven fast and hard. When you really floor a 330 from a stop, the 1-2 shift isn't perfectly smooth either (or in any car with decent power, for that matter). When you try to take off in the M3 in a "civil" manner, it feels "heavy". This was the deciding point for me, as I was considering an '03 M3 with 4K miles. I am going with the 330 w/ Steptronic, as my commute is about 2/3 city and 1/3 highway. It will be an improvement from the 323. If this was my fun car for weekends and occasional use, I'd definitely get the M3 with SMG.
I'm wondering if SMG 3 (?if/when?) will be like the Audi system with two clutches (DSG-Direct Shift Gearbox); the system anticipates which gear you'll need/choose next. To quote Road & Track (May 2004 Audi TT vs BMW Z 4): "DSG preselects the next gear......as you flip the paddle....the clutch of the engaged gear opens as the clutch of the next preselected gear closes. It all happens under load, and with utter smoothness--quite the opposite of SMG......loud thunk...and an abruptness that can only partially be smoothed out with some throttle lift." Again, this is not the same system as in the M3. They seem to conclude that the DSG is better than SMG in automatic mode, but SMG is better in manual mode. "(DSG) upshifts at redline, preventing you from holding on to a gear when you really want to."
One thing with Steptronic that I didn't know initially. When you flip the stick left, an "S" light comes in next to "D". This "sport automatic mode" is supposed to change the automatic shifting so shifts will be at higher rpm's. I don't know what it does when decelerating. Only when you flick it to up/downshift does it engage the manumatic mode.
To those who say only a clutch is manual, let's not forget that F1 cars apparently use a similar transmission.
I recently read in another post a good point: People expect an M3 to ride like a 330, but the car is more like a Ferrari with 4 comfy seats.