You do realize that both can be achieved. There is nothing wrong with having the currently labeled "Ultra" settings, be labeled "Medium" and have more impressive graphics labeled "Ultra" instead. Add in some new lower graphical settings to accommodate all the different settings available.
Somewhere in the last 10 years, people have grown to expect that their PC play all games at "Ultra", rather than adjusting settings to their needs.
Back in the day when I ran PCGamingStandards I did a blog post on this. You're absolutely right, there's nothing to stop developers from building a game which scales across lots of different hardware and giving gamers with low end hardware a decent experience while also allowing the settings to be cranked up to give high end rigs something to spend their power on.
In many cases the low, medium, high, ultra mentality is simply defining some hidden value, for example if this is view distance then it's setting the distance in world units from the player for which objects are rendered, what world units you map these settings on to is to some degree arbitrary, and in many games you can actually enter the ini/cfg files and change these units manually, good for old games you have more than enough power to run but you want them to look more pretty, typical of games like oblivion where there was a lot of LOD sliders which maxed out in game but could be pushed way higher in the ini files.
In many cases it's to help the egos of people with slow hardware, there is this perception that if their cards can't run in "max" or "medium" or some other expectation then the game is "badly optimized" which is a term I really hate because idiots throw this around without knowing what it actually means. Optimization simply means getting the same output using less resources, no one ever presents re-structured code or more optimized code they've made themselves when they make arguments of lack of optimization they simply say that they believe it should run better for how it looks, which isn't something backed by evidence.
What is more annoying is that some devs have actually built the game engine to be capable of this stuff but simply disable it by choice, Watch_Dogs was a good recently example, where once gamers found the appropriate console commands they simply re-enabled these additional effects.
This all suggests that there's too much politics in games and not enough striving for quality, we need to ignore the noise that is the moaning of thousands of gamers about subjective opinions of what constitutes low and medium and high and simply aim to provide as many customizations as possible.
I'd be in favour of ditching low/med/high/ultra in favour of giving us access to the raw values in the menu and a box where we can type whatever we like, leave in suggested values and have a "newb mode" where values are constrained within sensible values if you like, but give everyone access to scale the quality as they see fit.