KMZ is just zipped up KML (a file format for representing geodata)
Zipping achieves compression, which is important. KML is otherwise inefficient on disk space (like any XML)
Zipping also means any resources such as icon graphics, overlays, or other images can be bundled alongside the KML document. The KML document itself would normally be called 'doc.kml' inside the zip file, and not placed in any subdirectories.
See KML for all other details that XML file format