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Should they be replaced? Yes, but on a dry surface, that is not an unsafe tire, and most certainly not a tire that should experience sidewall failure. That tire looks like its at about 3/32nds. A tires usable life is down to 2/32nds. So yes, it needs replacing, but that doesn't at all explain sidewall failure of that type. I would certainly say that tire may have been run a few lbs short on air. 1 of 2 things might be the answer. Impact damage at some point made the tire weak in that spot (which should have resulted in a knot, but maybe not on a low profile tire like that) or improper dismount (some guy prying at the tire too aggressively).
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