Letterland is an older form of phonics teaching, when thorough knowledge of phonics was not prevalent. It bases its teaching from the letters of the alphabet rather than the sounds of the language. There are more sounds in our language than letters of the alphabet so this approach is limiting and requires too many 'rules' and 'exceptions' to be introduced to cope with all the 'extra' sounds that exist beyond the letters of the alphabet. It also encourages children to believe each letter has one sound, which makes introducing two letters making a different sound, and a letter making an alternative sound quite confusing and complex.
As already stated by some, many children do get very hung up on the characters than get the most out of their phonic associations. Not all children can make the association with intial sounds and to assume that this will help learn speech sounds is misleading. Also, speech sounds occur all through the word, so to feature mainly on the initial sounds is also limiting.
Jolly Phonics is a synthetic phonics scheme which is far more complete in exploring the speech sounds and all their related spelling patterns. It approaches from all the speech sounds first, with a story and action to help remember them - with no letter support at first; just hearing the sounds. Then, letters are matched to them and words are made using the sounds all through from the beginning to the end.
Jolly Phonics enables children to independently read unknown words very quickly. It is thorough and systematic - and huge fun! Children love the actions, pictures and stories but most of all, they love the fact they can read independently so quickly. This is the biggest motivator of all.
Letterland might be preferred by some but it's not necessarily just fun that teaches children to read. Some children are able to learn to read no matter how they are taught - some are justvery capable of working it out for themselves with mimimal initial knowledge and instruction.
But as far as choosing a method that will definitely teach all the required skills and knowledge in a fun, thorough and quick way and will definitely support all children in the long term regardless of if they are able or struggling readers, Jolly Phonics wins hands down.