Software giant Microsoft will next week introduce changes to its global licensing programme which will increase prices for almost one-third of Irish customers.

Under the new system, Microsoft will stop offering software upgrades to some customers, from October 1st. Instead, the company expects firms to subscribe to volume licensing agreements.

These licensing changes were strongly criticised last night by the Small Firms Association (SFA), which said it would increase costs for many of its members.

Under the proposed three-year volume licensing agreements, firms will pay Microsoft an annual fee entitling them to automatic upgrades of new software. Companies that do not subscribe to these new agreements will be forced to pay the full price for a new software product, which can cost twice the upgrade price.

For example, an existing Microsoft customer who does not sign up to the agreement would have to pay the retail price of £535 (€680) for Office XP, rather than an upgrade price of £248.

But Mr Joe Macri, country manager for Microsoft Ireland, said the volume licensing agreement would reduce prices for 20 per cent of its Irish customers and would be price neutral for half its customers.

"We surveyed our customers and the most consistent complaint was that our licensing system was too complex," he said. "Most customers would rather have a fixed-cost approach."

Mr Macri said customers who were signed up to Microsoft's Upgrade Advantage programme had until the end of February before they would have to comply with the new system.

This new approach to licensing by Microsoft is part of its move to sell software as a service rather than an out-of-the-box product. This will reduce many of the administrative costs associated with selling software, along with the physical costs involved with distributing software.

Microsoft will eventually move towards distributing its software products over the internet, when the necessary amount of bandwidth becomes available.

However, Mr Pat Delaney, director of the SFA, said Microsoft's new licensing system was a problem because it would increase costs for members.

"Small companies won't have the same volume of software licensing as larger companies so it will cost them more than larger enterprises," he said.

He said the timing was particularly negative because the industry was contracting, and that increased costs would be a problem for companies.

He also claimed that there had been an information deficit for some of his members.

Microsoft decided to introduce the new licensing structure in May. It recently extended the deadline to change over to the new system for those firms signed to its Upgrade Advantage scheme to February 28th 2002, from October 1st next. But the October 1st deadline remains for many smaller firms not on this programme.

Several international organisations are opposing the new licensing programme. The Infrastructure Forum, a British lobby group, claims it will increase firms' annual licence fees by up to 94 per cent.

The forum is calling for the British Office of Fair Trading to examine the Microsoft policy for alleged abuse of its near-monopoly on the supply of desktop office software, and has written to Ms Patricia Hewitt, the British government's trade and industry secretary, for support.

Microsoft has almost 90 per cent market share in the supply of desktop applications of office tools. Its competitors are Lotus and Wordperfect.

Mr Macri said Microsoft would continue to support customers who did not upgrade their software. If people do not see the business value in new software it is their choice, he added.