If you make a simplified system, like an inverted pendulum, in a browser, then it can be nicely visual. If you give a set of manual controls in the program, then students can get a feel for it. With appropriate piping, you should then be able to hook it up to Matlab for them to control as a real-time system from there. You can also inject noise and control errors to bring more realism and prevent unstable solutions from working.
In short: our computers are powerful enough these days that a satisfying virtual lab is quite within reach.