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The black bars at the top and bottom of the screen are normal for this format.
This term refers to a method of fitting a widescreen movie to the Aspect Ratio of a TV screen (commonly 4:3). This is done by shrinking the original frame until its width matches that of the 4:3 frame; the side effect is that the movie's height is now considerably less than that of the TV screen, resulting in black bars at the top and bottom forming a "box" around the film (it's rather like watching the film through a mail slot or "letter box", hence the term). Naturally, this is less of a concern with films that are not too wide to begin with — say, 1.85:1 — or with newer TV sets with wider screens.
Although letterboxing preserves the entirety of the picture as it was shot, that picture is (obviously) much smaller than a Pan and Scan transfer, which can be somewhat disconcerting on smaller television sets. Further, some viewers claim to be distracted by the empty black bars on the screen, preferring that the screen be filled with picture. Again, modern wide-screened TV sets help diminish this problem somewhat, although films shot in even wider formats (such as vintage CinemaScope, Todd-AO, Ultra Panavision 70, and Cinerama releases from the 1950s and '60s) are usually letterboxed rather than cropped even in the "widescreen" home video releases.
Although there was some consumer resistance to the format in the early years, it has now become virtually the norm for home video and to wish Pan and Scan instead is the mark of a rube dumb enough to spend the same amount of money for up to 33% less picture. Many newer movies released on home video actually make use of that dead space, having captions and subtitles appear in the black bars rather than within the frame itself. Even without such considerations, there are a number of commercials and TV shows that are formatted for letterbox presentation because it gives them a classy look like a big-budget feature film. (Many of which, amusingly, wound up windowboxed after the switch to widescreen, digital TV.)
Now to get really fancy: When this is done horizontally (that is, a 4:3-ratio image is letterboxed within a wider screen such as 16:9), it is known as "pillarboxing", after a type of upright mailbox used in England. And "windowboxing" occurs when an already-letterboxed image is pillarboxed, or vice versa, forming a black "picture frame" around the image.
Compare Visual Compression, Widescreen Shot.
Contrast Pan and Scan.
See also Eyedscreen for where letterboxing is used as a temporary effect.