I got an interesting answer to this question from the incredibly helpful and 
friendly Kingdom Bikes in Blue Hill, Maine.

Continental and perhaps other tire manufacturers include a piece of fabric that 
wraps from the inside of the tire, around the bead, and out onto the 
lower/inner part of the sidewall. It's meant to prevent problems from chafing. 
When the tire rolls, the fabric wears; my sidewall wasn't failing at all. The 
tire was just doing what it's supposed to do. All good!

And if you own the Redwood that's at Kingdom for service: nice bike!

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