Microsoft shares fell to a three-year low last week following investor concerns about how the software giant plans to combat the threat from online rivals such as Google and Yahoo.

The firm said that profits next year would be hit by an increase in spending on research and development (R&D), with a particular focus on producing more products to support internet-based software services, such as the Microsoft Live offerings announced last year.

Microsoft expects to spend $6.2bn (£3.3bn) on R&D in this financial year. The amount of funds available to MSN is set to increase more than 50 per cent to $1.1bn (£592m).

Chief executive Steve Ballmer says the advertising-funded software-as-a-service model pioneered by firms such as Google is vital to Microsoft’s future.

‘It’s key to making sure that we are a player in the advertising business, which is an important business for a software company to be in,’ he told the Reuters news agency.

With the launch of Vista, the next version of Windows, due in the next 12 months, this will be a critical year for Microsoft.

But analyst Gartner has already cast doubts, predicting further delays in Vista availability.

‘Microsoft consistently misses target dates for major operating system releases. We don’t expect broad availability of Windows Vista until at least the second quarter of 2007,’ said research vice president Michael Silver.