Someone on the Dog Health BB sent me this info on Pyoderma:

Mucocutaneous lesions around the lips and corners of the mouth appear as redness and crusting—problems that seem to occur more often in German shepherd dogs. Mucocutaneous pyoderma can be differentiated from immune-mediated skin disorders and nutritional disorders by a skin biopsy, but most cases will respond to topical antibacterial medications, alone or in combination with systemic antibiotics. Recurrence is likely.
Unfortunately, if your dog has a rash, it’s not likely to go away on its own. Your veterinarian may offer antibiotics as the treatment of choice if pyoderma is suspected, but he or she is likely to look for an underlying cause, which could be something as simple as poor grooming, or something as complex as an endocrine disorder that suppresses the immune system. If the skin problem is particularly puzzling or problematic, then a veterinary dermatologist may be consulted.