Pixellation is most often an artifact of insufficient playback horsepower, or conversely, excessive bitrate. In either case it is due to the playback mechanism not being able to keep up with the data rate.
It is sometimes caused by a dirty lens or faulty transport mechanism in a dvd player.
Some pornographic video material uses an intentional pixellation effect to mask "the naughty bits".
This effect is referred to as blocking by television technicians, in that context it is caused by high incidence of errors in a signal. I tend to think of blocking as being the result of low bitrate, where blocks (8x8 blocks of pixels) become uniformly colored, typically with the average color for the block.
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