Instructions
Navigate to the "Video" sub-menu on your XMB dashboard by pushing on the left thumbstick or the directional pad. Scroll down to the movie for which you want to create a thumbnail, then press "X" to start the movie.
Play the movie to the point you want to use to create your thumbnail. If the scene you want to use is quite late in the film, fast-forward by pressing "R2" or "Right" on the directional pad.
Press "Start" to stop the fast-forwarding, then press "Start" again to pause the film on the scene you want to use for the thumbnail. Press "Triangle" to bring up the video options.
Highlight the "Change Icon" option. This is the fifth option from the left on the top row of icons. Press "X" to see a prompt window explaining what the PS3 will do if you choose to continue. Highlight "OK," then press "X" to create the video thumbnail.