See http://drupal.org/node/1034374#comment-4791856

MODULE.field.inc

<?php
/**
* Implements hook_field_info().
*/
function MODULE_field_info() {
  return array(
    'video_thumbnail_settings' => array(
      'label' => t('Video Thumbnail Settings'),
      'description' => t('Configure Video Thumbnail display.'),
      'settings' => array(),
      'instance_settings' => array(),
      'default_widget' => 'video_thumbnail_settings_widget',
      'default_formatter' => 'video_thumbnail_settings_formatter',
      'no_ui' => FALSE // TODO: Set to TRUE and automatically create a field instance when needed
  ),
  );
}

/**
 * Implements hook_field_widget_info().
 */
function MODULE_field_widget_info() {
  return array(
    'video_thumbnail_settings_widget' => array(
      'label' => t('Default'),
      'field types' => array('video_thumbnail_settings'),
  ),
  );
}

/**
 * Implements hook_field_widget_form().
 */
function MODULE_field_widget_form(&$form, &$form_state, $field, $instance, $langcode, $items, $delta, $element) {
  $file =& $form_state['file'];

  if (!empty($file->uri)) {
    $scheme = file_uri_scheme($file->uri);
    $local_wrappers = file_get_stream_wrappers(STREAM_WRAPPERS_LOCAL);
    if (isset($local_wrappers[$scheme]) && ($movie = MODULE_ffmpeg_movie($file)) && $movie->hasVideo()) {
      if (isset($form_state['values'])) {
        $path = array_merge($element['#field_parents'], array($field['field_name'], $langcode));
        $path_exists = FALSE;
        $values = drupal_array_get_nested_value($form_state['values'], $path, $path_exists);
        if ($path_exists) {
          $items = $values;
          drupal_array_set_nested_value($form_state['values'], $path, NULL);
        }
      }
      else {
        foreach ($items as &$item) {
          switch ($item['mode']) {
            case 'select':
              $item['thumbnail']['framenumber'] = $item['value'];
              break;
            case 'media':
              $item['thumbnail']['fid'] = $item['value'];
              break;
          }
        }
      }
      $item = !empty($items[$delta]) ? $items[$delta] : array();
      $mode = !empty($item['mode']) ? $item['mode'] : 'random';
      $element += array(
        '#type' => 'fieldset',
        '#title' => 'Thumbnail',
        '#collapsible' => TRUE,
        '#collapsed' => TRUE,
        '#element_validate' => array('MODULE_field_widget_validate'),
        'mode' => array(
          '#type' => 'select',
          '#default_value' => $mode,
          '#options' => array(
            'random' => t('Extract random thumbnail'),
            'select' => t('Select extracted thumbnail'),
            'media' => t('Select image as thumbnail')
      ),
          '#return_value' => 1,
          '#ajax' => array(
            'callback' => 'MODULE_field_widget_form_thumbnail_callback',
            'wrapper' => 'thumbnail-wrapper',
      )
      ),
        'thumbnail' => array(
          '#prefix' => '<div id="thumbnail-wrapper">',
          '#suffix' => '</div>',
      )
      );
      switch ($mode) {
        case 'random':
          $element['thumbnail'] += array(
            '#type' => 'container',
          );
          break;
        case 'select':
          $framerate = $movie->getFrameRate();
          $framecount = $movie->getFrameCount();
          $interval = 10;
          $options = array();
          $framenumbers = array();
          $framenumber = 1;
          while ($framenumber < $framecount) {
            $framenumbers[] = (int)$framenumber;
            $framenumber += $interval * $framerate;
          }
          $framenumbers[] = (int)($framecount - ($framerate * 0.25));
          foreach(MODULE_video_extract_frames($file, $framenumbers) as $framenumber => $path) {
            $options[$framenumber] = theme('image_style', array(
              'style_name' => 'thumbnail',
              'path' => $path,
              'title' => format_interval($framenumber / $framerate)
            ));
          }
          $element['thumbnail'] += array(
            '#type' => 'container',
          );
          $element['thumbnail']['framenumber'] = array(
            '#type' => 'radios',
            '#options' => $options,
            '#default_value' => $item['thumbnail']['framenumber'],
            '#required' => FALSE,
          );
          break;
        case 'media':
          $element['thumbnail'] += array(
            '#type' => 'media',
            '#mutliple' => FALSE,
            '#title' => FALSE,
            '#default_value' => array('fid' => $item['thumbnail']['fid']),
            '#description' => t('Select an existing image or upload a new one to be used as thumbnail for this video.'),
            '#media_options' => array(
              'global' => array(
                'types' => array('image'),
          )
          )
          );
          break;
      }
    }
  }
  $element['#attached']['css'][] = drupal_get_path('module', 'MODULE') . '/css/MODULE.theme.css';
  $element['#attached']['js'][] = drupal_get_path('module', 'MODULE') . '/js/MODULE.widget.js';
  return $element;
}

/**
 * Implements hook_field_widget_validate().
 */
function MODULE_field_widget_validate($element, &$form_state) {
  $item = array('mode' => $element['mode']['#value']);
  switch($item['mode']) {
    case 'random':
      $item['value'] = 0;
      break;
    case 'select':
      $item['value'] = !empty($element['thumbnail']['framenumber']) ? $element['thumbnail']['framenumber']['#value'] : 0;
      break;
    case 'media':
      $item['value'] = !empty($element['thumbnail']['fid']) ? $element['thumbnail']['fid']['#value'] : 0;
      break;
  }
  form_set_value($element, $item, $form_state);
}

/**
 * Ajax callback to update the 'thumbnail' element.
 *
 * @see MODULE_field_widget_form().
 */
function MODULE_field_widget_form_thumbnail_callback($form, $form_state) {
  $triggering_element = $form_state['triggering_element'];
  $form_state['triggering_element']['#array_parents'];

  if ($triggering_element['#type'] == 'select') {
    $parents = array_slice($triggering_element['#array_parents'], 0, -1);
  }
  else {
    $parents = array_slice($triggering_element['#array_parents'], 0, -2);
  }
  $parents[] = 'thumbnail';
  return drupal_array_get_nested_value($form, $parents);
}

/**
 * Implements hook_field_formatter_info().
 */
function MODULE_field_formatter_info() {
  return array(
    'video_thumbnail_settings_formatter' => array(
      'label' => t('Default'),
      'field types' => array('video_thumbnail_settings'),
    ),
  );
}

/**
 * Formatter for the video_thumbnail_settings_formatter.
 */
function MODULE_field_formatter_view($entity_type, $entity, $field, $instance, $langcode, $items, $display) {
  //Don't do anything for video_thumbnail_settings_formatter  
}

/**
 * Implements hook_field_formatter_settings_form().
 */
function MODULE_field_formatter_settings_form($field, $instance, $view_mode, $form, &$form_state) {
  $display = $instance['display'][$view_mode];
  $settings = $display['settings'];

  $element = array();

  //Don't do anything for video_thumbnail_settings_formatter

  return $element;
}

/**
 * Implements hook_field_is_empty().
 */
function MODULE_field_is_empty($item, $field) {
  if (!empty($item['mode'])) {
    switch ($item['mode']) {
      case 'random':
        return FALSE;
        break;
      case 'select':
      case 'media':
        return empty($item['value']);
        break;
    }
  }
  else {
    return TRUE;
  }
}

/**
 * Implements hook_field_validate().
 */
function MODULE_field_validate($entity_type, $entity, $field, $instance, $langcode, $items, &$errors) {
  $function = __FUNCTION__ . '_' . $field['type'];
  if (function_exists($function)) {
    return $function($entity_type, $entity, $field, $instance, $langcode, $items, $errors);
  }
}

/**
 * Implements hook_field_validate() for the video_thumbnail_settings filed type.
 */
function MODULE_field_validate_video_thumbnail_settings($entity_type, $entity, $field, $instance, $langcode, $items, &$errors) {
  if ($entity_type == 'file') {
    foreach ($items as $delta => $item) {
      switch ($item['mode']) {
        case 'random':
          break;
        case 'select':
          $file = file_load($entity->fid);
          $scheme = file_uri_scheme($file->uri);
          $local_wrappers = file_get_stream_wrappers(STREAM_WRAPPERS_LOCAL);
          if (isset($local_wrappers[$scheme]) && ($movie = MODULE_ffmpeg_movie($file)) && $movie->hasVideo()) {
            $framecount = $movie->getFrameCount();
            if ($item['value'] < 1 || $item['value'] >= $framecount) {
              $errors[$field['field_name']][$langcode][$delta][] = array(
                'error' => 'video_thumbnail_settings_framenumber',
                'message' => t('Invalid thumbnail frame number.'),
              );
            }
          }
          break;
        case 'media':
          $thumbnail = file_load($item['value']);
          if (!$thumbnail || $thumbnail->type !== 'image') {
            $errors[$field['field_name']][$langcode][$delta][] = array(
              'error' => 'video_thumbnail_settings_media',
              'message' => t('Invalid thumbnail media.'),
            );
          }
          break;
        default:
          $errors[$field['field_name']][$langcode][$delta][] = array(
            'error' => 'video_thumbnail_settings_mode',
            'message' => t('Invalid thumbnail mode.'),
        );
        break;
      }
    }
  }
}

MODULE.module

<?php

// @todo Remove when http://drupal.org/node/977052 is fixed.
require_once dirname(__FILE__) . '/MODULE.field.inc';

/**
 * Implement hook_file_formatter_info().
 */
function MODULE_file_formatter_info() {
  $formatters = array();
  if (extension_loaded('ffmpeg')) {
    $formatters['video_thumbnail'] = array(
      'label' => t('Video Thumbnail'),
      'default settings' => array(
        'image_style' => '',
        'field' => '',
      ),
      'view callback' => 'MODULE_file_formatter_video_thumbnail_view',
      'settings callback' => 'MODULE_file_formatter_video_thumbnail_settings',
    );

  }
  return $formatters;
}

/**
 * Helper function to retrieve the path to an extracted video frame as a JPG
 * file.
 *
 * @param string $uri
 *  The URI of the video file.
 * @param int $framenumber
 *  The extracted frame number.
 *
 * @return
 *  The path for an extracted video frame as a JPG file. The actual file may not
 *  exist.
 */
function MODULE_video_frame_path($uri, $framenumber = 0) {
  $scheme = file_uri_scheme($uri);
  if ($scheme) {
    $path = file_uri_target($uri);
  }
  else {
    $path = $uri;
    $scheme = file_default_scheme();
  }
  return $scheme . '://video_frames/' . $scheme . '/' . preg_replace('/\.[^.]+$/', "-$framenumber.jpg", $path);
}

/**
 * Build the poster frame for an video file.
 *
 * @param object $file
 *  The (fully loaded) file entity for which to build a poster frame.
 * @param array $settings
 *  The build settings, the following properties are supported
 *   - 'mode': one of 'select', 'random' and 'media'.
 *   - 'value': if 'mode' is 'media', the fid of (image) file entity to use as
 *              poster frame. If 'mode' is 'select', the frame number of the
 *              frame to extract as poster frame. Not used if 'mode' is 'random'
 *
 * @return
 *  The path to an image file to use as poster frame. Or NULL if no poster frame
 *  could be build (invalid file or settings).
 */
function MODULE_build_video_poster_frame($file, $settings) {
  if (is_object($file) && !empty($file->type) && $file->type === 'video') {
    switch ($settings['mode']) {
      case 'media':
        $thumbnail_file = file_load($settings['value']);
        if ($thumbnail_file && ($thumbnail_file->type == 'image')) {
          $path = $thumbnail_file->uri;
        }
        break;
      case 'random':
        $settings['value'] = 0;
      case 'select':
        $path = MODULE_video_extract_frame($file, $settings['value']);
        break;
    }
    if (!empty($path) && file_exists($path)) {
      return $path;
    }
  }
  return NULL;
}

/**
 * Helper function to extract a single frame from a video file. The extracted
 * frame file name is build by appending the frame number to the video file
 * name. If the given frame bnumber is 0 (or not a number), then a random frame
 * is extracted but 0 is used as suffix when building the frame file name.
 *
 * @param object $file
 *  A file entity.
 * @param int $framenumber
 *  (optional) The frame from the movie to extract.
 *
 * @return
 *  The path to the extracted frame as a unmanaged JPG file. Or NULL if no frame
 *  could be extracted.
 *
 */
function MODULE_video_extract_frame($file, $framenumber = 0) {
  if (!is_numeric($framenumber)) {
    $framenumber = 0;
  }
  $paths = MODULE_video_extract_frames($file, array($framenumber));
  if (empty($paths)) {
    return NULL;
  }
  else {
    return reset($paths);
  }
}

/**
 * Helper function to extract multiples frame sfrom a video file. The extracted
 * frames file names are build by appending the frame numbers to the video file
 * name. If a given frame number is 0 (or not a number), then a random frame is
 * extracted but 0 is used as suffix when building the frame file name.
 *
 * If for some reason a frame couldn't get extracted (ie. it frame number is
 * lower than the frame count but ffmpeg_movie::getFrame() returns null). Then
 * the first found frame before the requested one is used.
 *
 * @param object $file
 *  A file entity.
 * @param int $framenumbers
 *  (optional) The frames from the movie to extract.
 *
 * @return
 *  An array of paths for the extracted frame as a unmanaged JPG files, indexed
 *  by the (requested) frame number.
 *
 */
function MODULE_video_extract_frames($file, $framenumbers, $suffix = TRUE) {
  set_time_limit(0);
  $scheme = file_uri_scheme($file->uri);
  $local_wrappers = file_get_stream_wrappers(STREAM_WRAPPERS_LOCAL);
  $paths = array();
  if (isset($local_wrappers[$scheme])) {
    $suffix = $suffix || (count($framenumbers) > 1);
    if (($movie = MODULE_ffmpeg_movie($file)) && $movie->hasVideo()) {
      sort($framenumbers);
      $framecount = $movie->getFrameCount();
      $framerate = $movie->getFrameRate();
      foreach ($framenumbers as $framenumber) {
        $path = MODULE_video_frame_path($file->uri, $framenumber);
        if (!file_exists($path)) {
          $requested_framenumber = $framenumber;
          if ($framenumber < 1 || !is_numeric($framenumber)) {
            $framenumber = rand(1, $framecount - 1);
          }
          $frame = NULL;
          // Loop until we get a frame.
          while (!$frame && $framenumber > 0) {
            $frame =  $movie->getFrame($framenumber--);
          }
          if ($frame) {
            $resource = $frame->toGDImage();
            file_prepare_directory(drupal_dirname($path), FILE_CREATE_DIRECTORY);
            if (imagejpeg($resource, drupal_realpath($path))) {
              $paths[$requested_framenumber] = $path;
            }
            imagedestroy($resource);
          }
        }
        else {
          $paths[$framenumber] = $path;
        }
      }
    }
  }
  return $paths;
}

/**
 * Return a ffmpeg_movie object for a file. ffmpeg_movie objects are statically
 * cached.
 *
 * @param object $file
 *  A file object.
 *
 * @return
 *  A ffmpeg_movie instance. Or null if $file is not a local file or if an
 *  instance could not be created.
 *
 * @see ffmpeg_movie::__construct().
 */
function MODULE_ffmpeg_movie($file) {
  $cache =& drupal_static(__FUNCTION__, array());
  $scheme = file_uri_scheme($file->uri);
  $local_wrappers = file_get_stream_wrappers(STREAM_WRAPPERS_LOCAL);
  if (isset($local_wrappers[$scheme])) {
    if (!isset($cache[$file->uri])) {
      return $cache[$file->uri] = @(new ffmpeg_movie(drupal_realpath($file->uri)));
    }
    else {
      return $cache[$file->uri];
    }
  }
  return NULL;
}

/**
 * View callback for the Video Thumbnail file formatter.
 */
function MODULE_file_formatter_video_thumbnail_view($file, $display, $langcode) {
  $settings = !empty($display['settings']['field']) ? field_get_items('file', $file, $display['settings']['field']) : FALSE;
  if ($settings === FALSE) {
    $settings = array('mode' => 'random', 'value' => 0);
  }
  else {
    $settings = reset($settings);
  }
  $path = MODULE_build_video_poster_frame($file, $settings);
  if (!empty($path)) {
    if (!empty($display['settings']['image_style'])) {
      $element = array(
        '#theme' => 'image_style',
        '#style_name' => $display['settings']['image_style'],
        '#path' => $path,
      );
    }
    else {
      $element = array(
        '#theme' => 'image',
        '#path' => $path,
      );
    }
    return $element;
  }
}

/**
 * Settings callback for the Video Thumbnail file formatter.
 */
function MODULE_file_formatter_video_thumbnail_settings($form, &$form_state, $settings) {
  $element = array();
  $element['image_style'] = array(
    '#title' => t('Image style'),
    '#type' => 'select',
    '#options' => image_style_options(FALSE),
    '#default_value' => $settings['image_style'],
    '#empty_option' => t('None (original image)'),
  );

  // TODO: Remove this setting and use a single automatically create field instance
  $fields = array();
  foreach (field_info_instances('file', $form['#file_type']) as $instance) {
    $field = field_info_field_by_id($instance['field_id']);
    if ($field['type'] == 'video_thumbnail_settings') {
      $fields[$field['field_name']] = $instance['label'];
    }
  }
  if (!empty($fields)) {
    $element['field'] = array(
    '#title' => t('Thumbnail frame from field:'),
    '#type' => 'select',
    '#options' => $fields,
    '#default_value' => $settings['field'],
    '#empty_option' => t('None (random frame)'),
  );
  }
  return $element;
}



/**
 * Implements hook_file_formatter_info_alter().
 */
function MODULE_file_formatter_info_alter(&$info) {
  // Orverride the MediaElement File Field formatter wrapped by File entity to
  // use our own callbacks and extend the available settings.
  $info['file_field_mediaelement_video']['view callback'] = 'MODULE_file_formatter_mediaelement_view';
  $info['file_field_mediaelement_video']['settings callback'] = 'MODULE_file_formatter_mediaelement_settings';
  $info['file_field_mediaelement_video']['default settings']['poster'] = '';
  $info['file_field_mediaelement_video']['default settings']['detect_size'] = FALSE;
}

/**
 * Settings form callback for the mediaelement video file formatter (not file
 * field).
 *
 * @see file_entity_file_formatter_file_field_settings()
 */
function MODULE_file_formatter_mediaelement_settings($form, &$form_state, $settings, $formatter_type, $file_type, $view_mode) {
  // Get the settign form as provided by the File Entity module.
  $form = file_entity_file_formatter_file_field_settings($form, $form_state, $settings, $formatter_type, $file_type, $view_mode);

  // Additional settings
  $poster_options = array(
    NULL => t('None'),
    'random' => t('Select a random frame'),
  );
  $fields = array();
  foreach (field_info_instances('file', $file_type) as $instance) {
    $field = field_info_field_by_id($instance['field_id']);
    if ($field['type'] == 'video_thumbnail_settings') {
      $poster_options['field_' . $field['field_name']] = $instance['label'];
    }
    if (in_array($field['type'], array('file', 'link_field', 'media'))) {
      $tracks_options[$field['field_name']] = $instance['label'];
    }
  }
  $form['detect_size'] = array(
    '#type' => 'checkbox',
    '#title' => t('Detect video size'),
    '#description' => t('If checked, the height and width of the video will be detected and the Height and Witdh settings will be used as maximum values.'),
    '#default_value' => $settings['detect_size']
  );
  $form['poster'] = array(
    '#type' => 'select',
    '#title' => t('Poster frame'),
    '#options' => $poster_options,
    '#default_value' => $settings['poster'],
  );

  if (!empty($tracks_options)) {
    $form['tracks'] = array(
      '#type' => 'fieldset',
      '#title' => t('Text tracks'),
      '#description' => t('Select the fields used to provide <a href="@url">Text tracks</a> for the video element.', array(
        '@url' => 'http://www.w3.org/TR/html5/video.html#text-track',
      )),
      '#collapsible' => TRUE,
      '#collapsed' => FALSE,
      '#tree' => TRUE,
    );
    $kinds = array(
      '' => t("Don't use as tracks"),
      'subtitles' => t('Subtitles'),
      'captions' => t('Caption'),
      'descriptions' => t('Descriptions'),
      'chapters' => t('Chapters'),
      'metadata' => t('Metadata'),
    );

    foreach($tracks_options as $field_name => $title) {
      $form['tracks'][$field_name] = array(
        '#type' => 'select',
        '#title' => $title,
        '#options' => $kinds,
        '#default_value' => !empty($settings['tracks'][$field_name]) ? $settings['tracks'][$field_name] : NULL,
      );
    }
  }
  return $form;
}

/**
 * View callback for the mediaelement video file formatter (not file field).
 *
 * @see file_entity_file_formatter_file_field_view();
 */
function MODULE_file_formatter_mediaelement_view($file, $display, $langcode) {
  $element = file_entity_file_formatter_file_field_view($file, $display, $langcode);
  if ($element) {
    // Apply poster frame settings
    if (!empty($display['settings']['poster'])) {
      $poster_settings = ($display['settings']['poster'] !== 'random') ? field_get_items('file', $file, substr($display['settings']['poster'], 6)) : FALSE;
      if ($poster_settings === FALSE) {
        $poster_settings = array('mode' => 'random', 'value' => 0);
      }
      else {
        $poster_settings = reset($poster_settings);
      }
      $path = MODULE_build_video_poster_frame($file, $poster_settings);
      if (!empty($path)) {
        $element['#attributes']['poster'] = file_create_url($path);
        $element['#attributes']['poster'] = file_create_url($path);
      }
    }
    // Apply size detection settings
    if (!empty($display['settings']['detect_size']) && $movie = MODULE_ffmpeg_movie($file)) {
      $height = $movie->getFrameHeight();
      $width = $movie->getFrameWidth();
      $ratio = $width / $height;
      if ($display['settings']['width'] > 0 && $width > $display['settings']['width']) {
        $height = $display['settings']['width'] / $ratio;
        $width = $display['settings']['width'];
      }
      if ($display['settings']['height'] > 0 && $height > $display['settings']['height']) {
        $width = $ratio * $height;
        $height = $display['settings']['height'];
      }
      $element['#settings']['height'] = $element['#attributes']['height'] = $height;
      $element['#attached']['js'][0]['data']['mediaelement']['.' . $element['#attributes']['class']]['opts']['videoHeight'] = $height;
      $element['#settings']['width'] = $element['#attributes']['width'] = $width;
      $element['#attached']['js'][0]['data']['mediaelement']['.' . $element['#attributes']['class']]['opts']['videoWidth'] = $width;
    }
    // Apply tracks settings
    if (!empty($display['settings']['tracks'])) {
      foreach (array_filter($display['settings']['tracks']) as $field_name => $kind) {
        foreach(field_available_languages('file', $field_name) as $langcode) {
          if ($values = field_get_items('file', $file, $field_name, $langcode)) {
            $field = field_info_field($field_name);
            foreach($values as $value) {
              $track = array();
              switch($field['type']) {
                case 'file':
                  $value = (object)$value;
                  $track += array(
                    'src' => file_create_url($value->uri),
                    'label' => entity_label('file', $value),
                  );
                  break;
                case 'media':
                  $value = $value['file'];
                  $track += array(
                    'src' => file_create_url($value->uri),
                    'label' => entity_label('file', $value),
                  );
                  break;
                case 'link_field':
                  // FIXME Does it work ?
                  $track += array(
                    'src' => $value['url'],
                    'label' => check_plain($value['title']),
                  );
                  break;
              }
              if ($track) {
                $track += array(
                  'srclang' => $langcode,
                  'kind' => $kind,
                );
                $element['#tracks'][] = $track;
              }
            }
          }
        }
      }

    }
    return $element;
  }
}

MODULE.theme.css

#thumbnail-wrapper .form-radios .form-type-radio {
 float: left;
}

#thumbnail-wrapper .form-radios .form-type-radio input {
 display: none;
}

#thumbnail-wrapper .form-radios .form-type-radio label {
 display: block;
 overflow: hidden;
 /*border: 1px solid transparent;*/
}

#thumbnail-wrapper .form-radios .form-type-radio label img {
 border: 2px dashed transparent;
 padding: 1px;
}

#thumbnail-wrapper .form-radios .form-type-radio.selected label img {
 border-color: #0074BD;
}

MODULE.widget.js

(function($){
  Drupal.behaviors.videoThumbnailSettingsField = {
    attach: function(context, setting) {
      jQuery('#thumbnail-wrapper .form-radios', context)
        .once('video-thumbnail-settings-field')
        .delegate('input:radio', 'change', function(e){
          jQuery(this)
            .parents('.form-radios')
              .find('.form-type-radio')
                .removeClass('selected')
              .end()
            .end()
            .parents('.form-type-radio')
              .addClass('selected')
            .end()
        })
        .find('input:checked')
          .parents('.form-type-radio')
            .addClass('selected');
    }
  };
}(jQuery));