1.I've used TMPEGnc or whatever it's name was in the past, and since ~2 years I'm using EO-Video to cut Movies. It splits Movie files into clips automatic and is able to handle a lot more things etc. so it's a nice tool.
For the Thumbs I'm using Photoshop, and do them by hand. I think it's important that they look good, cause they are more or less that what should make the surfer curious and willing to sign up.
2.I don't use any hotlink protection, IMHO most hotlinkers try to find victims where they can hotlink an entire collection of movies at once like
yourdomain.com/mpeg1.mpg
yourdomain.com/mpeg2.mpg
yourdomain.com/mpeg3.mpg
yourdomain.com/mpeg4.mpg
yourdomain.com/mpeg5.mpg
if you rename them in a random way it's not possible for hotlinkers to find the entire set, they can only hotlink the movies they find in your gallery, and that doesn't hurt too much. So that's my hotlink protection
3.I don't think that it's easier to make more sales with Movie Galleries, you'll make more sales if you show movie galleries to TGP surfers, cause you show them something special. But on a common MGP with tons of other Movie Galleries you'll not convert better. And in the end I make pretty much the same with either Movie or Picture Galleries.
4. Have fun finding them, many sponsors either offer too small movie files (should be above 1.5MB), or too small sets so you can't make an gallery out of them (at least 3 Movies of 1 set would be good)
You can try out
Braincash, or take a look at some AENs and build your own Site