Re: rotting walls next to my tile
First you have to figure out the cause, which is most likely excessive moisture and insufficient caulking and/or paint to seal the drywall.
The repair method will depend on the severity of the damage. If the paper has separated from the surface of the drywall, then the drywall must be replaced. If the paper is intact, but just flaking the texture and paint, then you can do a topical repair.
Regardless of how the repair is made, you must take steps to insure that the issue doesn't resurface. Again, my suspicion is that it's a caulking and paint issue, however, if there is standing water outside the shower, then you need to address this issue as well as the wall damage. When you repaint, use two coats of primer over the patch, then one coat of paint over the patch, then a new coat of paint over the entire wall. This will not only help to blend in the patch, it will reseal and protect the entire wall.
Make sure that the caulking inside and outside of the shower is in good working condition as well. Whether you caulk or paint first is your decision, though caulking first will allow the paint to hide much of the caulk. Also, before repainting the room, wash the walls down with a TSP solution to clean them of soap, dirt, and body oils, follow up with a rinse to remove any remnants of TSP or grime.
I suffer from CDO ... Its like OCD, but in alphabetical order, LIKE IT SHOULD BE!!!