When it comes to virtual-world style social networks for young kids, there are two big players: Webkinz and Club Penguin, the latter of which was bought by Disney for $340-million earlier this year (interestingly enough, both of them are Canadian — Webkinz is an offshoot of a Toronto toy company called Ganz, and Club Penguin was started by a couple of years ago by a group of Web designers living in Kelowna, B.C.).

Both sites have made their reputations in part on how wholesome and family-oriented they are — historically, neither one of them accepted advertising, for example. Webkinz recently broke with that tradition, however, and started including advertising on its pages, and there has been an outcry about this that made it into the New York Times. Henry Blodget at Silicon Alley Insider says that a “greedy” Webkinz has “trashed its brand” and “infuriated” parents.

To me, however, the story seems a little more complicated than either the Times piece or Henry’s post are willing to admit. The always level-headed Anne Zelenka has a good roundup of the events at GigaOm, and from her description it’s clear that the reaction to the Webkinz move is considerably less black and white. In fact, the only ones who seem infuriated are a lobby group called the Campaign for a Commercial-Free Childhood.

It’s true that there are parents who responded negatively in the comments on a popular Webkinz-oriented blog, called Webkinzmom.com, many of whom made the point that they pay for the toys that give them access to the website, and so there shouldn’t be advertising. If you read through the comments there and elsewhere, however, you find just as many or more saying they don’t mind at all — and plenty of people wondering how they can get the Bee Movie costumes for their Webkinz pets.

Webkinz also responded to the criticisms on Webkinzmom in a letter, in which the company said that it plans to only accept a limited amount of advertising, that it will only run ads for family-friendly products such as toothpaste or family movies, and that it will not allow any links from the ads to outside websites, so that parents don’t have to worry about their kids wandering out onto the Internet unsupervised. Most of the responses on the blog seem okay with these limits.

It’s a lot of fun to slam Webkinz for creating a PR nightmare, but there seems to be a bit more to it than that.

It’s rare enough to have an industry-leading Web service that is based in Canada, let alone two of the top 10. But if you define “online virtual worlds aimed at children” as an industry, then that’s what we’ve got with Club Penguin and Webkinz. The former just got acquired by Disney for an eye-popping $700-million, after less than two years in business.

In what is sure to become a legendary Canadian example of bootstrapping a company, the popular social networking/game site was created by three friends in Kelowna, B.C. as a wholesome place for their young children to play and was completely self-funded by credit cards, angel investors and friends (much to the chagrin of several VCs).

Webkinz is a little different from Club Penguin. While the latter is strictly an online phenomenon, Webkinz — which also got its start about two years ago, but in Toronto — is a clever blend of online virtual world and offline toy. The company behind the site, a third-generation toy company called Ganz, came up with the idea of creating a toy that had a virtual doppelganger on a social-networking style website. Webkinz plush animals (which cost $15 each) come with a code that gives their owner access to the Webkinz world. They can then design a “house” for their avatar, and buy toys or furniture with their virtual money, or Kinz Cash. They also have to take care of their virtual pet, and players can chat — but only using stock phrases generated by the site — as well as play games and win Kinz Cash.

Club Penguin and Webkinz are alike in one thing, apart from their appeal for young children and “tweens”: although Ganz (a private company) doesn’t release membership figures, it and Club Penguin appear to have roughly the same number of subscribers — about 4 million or so, according to several estimates. Does that mean Webkinz might be worth $700-million too? After all, Club Penguin reportedly talked to several other companies about an acquisition, including Sony, which was ready to offer $500-million, as well as News Corp. (although Ganz itself has not confirmed any previous talks).

The Webkinz business model is slightly different, however. While both sites have a free section in which kids can play to a limited extent, in order to do anything more elaborate they have to become members — which in Club Penguin’s case costs $5.95 a month or $60 for a year. Webkinz owners can get access to everything by buying a single toy, which only costs $15, although many owners (such as the woman we wrote about in this story) have half a dozen Webkinz or more. But while Club Penguin’s revenues may be higher, Ganz has likely made about $60-million already on its virtual venture.

Whether that is appealing enough for a takeover bid is difficult to say, and it’s also unclear whether Ganz would be willing to sell Webkinz, which is likely a blockbuster cash generator for the company. One (possibly hopeful) venture capitalist blogged recently that he could see a spin-off, acquisition or even an IPO in the company’s future, but Ganz spokesman Susan McVeigh said late Thursday that the toymaker likely wouldn’t be interested. “Ganz is a privately-held family business and is very proud of that,” she said.